U.K. Economy Contracts Again in May, Raising Pressure on BoE to Ease Rates
The U.K. economy shrank for the second consecutive month in May, showing little sign of recovery after April’s sharp decline and increasing pressure on the Bank of England to consider further interest rate cuts.
According to data released Friday by the Office for National Statistics, U.K. gross domestic product (GDP) fell by 0.1% in May, following a steeper 0.3% contraction in April — the largest monthly drop since October 2023.
The May result came in below expectations of 0.1% growth. Industrial production declined by 0.9% and manufacturing output fell by 1.0%, weighing on the overall figure.
April’s downturn was driven by a reduction in legal activity linked to a hike in stamp duty, combined with higher energy costs, increased National Insurance contributions, and ongoing uncertainty around tariffs. These same pressures appear to be continuing into May, hindering the performance of the world’s sixth-largest economy.
Year-over-year, GDP in May grew 0.7%, down from 0.9% growth in April, suggesting the recovery remains fragile.
Looking ahead, Chancellor Rachel Reeves may face pressure to raise tens of billions of pounds in new taxes later this year. This follows internal resistance within the Labour Party to proposed welfare reforms, casting doubt on the government’s ability to curb public spending.
The Bank of England left interest rates unchanged at 4.25% last month. However, financial markets are pricing in at least two quarter-point cuts, with expectations for the policy rate to reach 3.75% by year-end.
While modest growth had been expected in May, some positive indicators had emerged. Consumer sentiment had started to improve, and the slowdown in the housing market — triggered by April’s property transaction tax hike — began to ease in June, according to data from the Royal Institution of Chartered Surveyors (RICS).
RICS reported that new buyer enquiries turned positive for the first time since December, and agreed sales also picked up, offering a tentative sign of stabilization in the housing sector.
Still, fiscal pressures loom. Reeves is likely to face a challenging task balancing revenue needs with political realities as the new government attempts to steer the economy through a delicate period.
