The UK economy shrank for the second consecutive month in May, as construction and production output tumbled amid Labour’s tax increases, the cost-of-living crisis and concerns about Donald Trump’s tariffs.
The 0.1% contraction in May will rightly pile pressure on the Labour government, which has talked the economy down and manufactured a slowdown in activity through increases to National Insurance.
Businesses are dialling back hiring plans, and it’s hitting the economy.
Services showed slight resilience with a minor 0.1% expansion in activity, but a 0.9% contraction in production output and a 0.6% fall in construction dragged the UK economy lower.
Economists had expected a 0.1% increase in GDP in May, so the second straight monthly GDP contraction caught the market off guard and sent the pound 0.3% lower against the dollar.
One would hope that if Rachel Reeves is crying into her cornflakes this morning, she’s also thinking about a credible plan to undo the damage her Labour government has done to the economy.
“Some strength in the IT and professional services sectors mean services growth as a whole scraped into positive territory for the month. However, that was not enough to offset contractions in manufacturing and construction sectors, meaning the UK economy shrank unexpectedly in May,” said Nicholas Hyett, Investment Manager at Wealth Club.
“Higher US tariffs seem to be causing some of the UK’s woes, especially in car manufacturing – which faced the full brunt of tariffs early on. Changes to stamp duty have also weighed on the construction sector.
“An optimist might argue these are one off headwinds – US tariffs on UK cars have already been softened, and the housing market will get moving again once its had time to adjust. The problem is that it’s difficult to see what turns things around.”