The UK economy contracted by 0.1% in May, defying market expectations of modest growth and dealing a fresh blow to Chancellor Rachel Reeves as speculation intensifies over potential tax increases in the upcoming autumn budget.
According to data released by the Office for National Statistics (ONS), gross domestic product (GDP) shrank unexpectedly following a 0.3% decline in April, marking the second consecutive month of economic contraction.
The downturn was driven primarily by weak performances in manufacturing, construction, oil and gas extraction, car production, and pharmaceuticals—despite slight gains in the services sector.
“These downbeat figures undoubtedly increase anxiety over the health of the UK economy, with tumbling construction and manufacturing activity causing a disheartening decline in overall output,” said Suren Thiru, Economics Director at the Institute of Chartered Accountants in England and Wales.
The figures come amid renewed scrutiny of Labour’s growth strategy and fiscal policy, especially following the government’s U-turn on disability benefit reforms. The reversal is projected to cost the Treasury over £5 billion, adding to the financial burden caused by an earlier climbdown on winter fuel payments, which amounted to £1.25 billion.
Mel Stride, the Shadow Chancellor, warned: “Labour’s U-turns have created a ticking tax timebomb. Thanks to Labour’s reckless choices the economy actually shrank in May. This will pile even further pressure for tax rises in the autumn.”
Chancellor Rachel Reeves acknowledged the downturn, stating: “While today’s figures are disappointing, I am determined to kickstart economic growth and deliver on that promise. Getting more money in people’s pockets is my number one mission.”
However, many analysts argue that further tax increases could undermine fragile consumer and business confidence. Ben Jones, Lead Economist at the Confederation of British Industry (CBI), said: “With growing fiscal challenges and the autumn budget on the horizon, the Chancellor must provide clear reassurance – no new taxes on business and instead offer a commitment to work alongside firms to dismantle barriers to growth.”
Economists suggest the declines in April and May were partly due to short-term distortions. In the first quarter of 2025, the UK economy grew by 0.7%, outperforming all other G7 nations. Much of this growth was front-loaded, driven by exporters rushing to beat former US President Donald Trump’s 2 April “liberation day” tariff hike and buyers taking advantage of a temporary cut to stamp duty in England and Northern Ireland.
Manufacturing, which had surged in early 2025, has since weakened amid global uncertainty. Despite a trade agreement between the UK and the US and closer ties with the EU, Bank of England Governor Andrew Bailey warned that “trade policy uncertainty still clouds the outlook.”
The independent Office for Budget Responsibility (OBR) currently forecasts annual GDP growth of 1% in 2025, though it may revise that figure ahead of the autumn statement.
The economic downturn has fuelled expectations that the Bank of England will cut interest rates from 4.25% at its August meeting.
Sanjay Raja, Chief UK Economist at Deutsche Bank, noted: “For now, weakness in GDP will cement some on the MPC’s fears that demand is loosening faster than expected. An August rate cut looks almost certain. And we expect more to come.”
As economic uncertainty deepens, the Chancellor faces growing pressure to strike a balance between stabilising public finances and reviving business and household confidence across the UK.
