UK economy contracts for second month, fuelling rate cut talks

Britain's economy unexpectedly shrank for the second month in a row in May, raising pressure on the Labour government and boosting expectations for an interest rate cut in August.

The UK economy contracted by 0.1% in May following a 0.3% drop in April, according to the Office for National Statistics on 11 July.

The data surprised economists, who had forecast a slight recovery. While the services sector saw minimal growth, a fall in industrial production and construction led to an overall decline in GDP.

After a strong start to 2025, growth momentum has stalled. Analysts now suggest the April-to-June quarter may see little or no expansion.

The Bank of England, which had previously raised its annual growth forecast to 1%, may respond by cutting interest rates next month.

“The weak figures suggest an August rate cut looks increasingly inevitable,” said Suren Thiru of ICAEW, despite recent inflation concerns.

Prime Minister Keir Starmer’s Labour government is under mounting pressure to revive growth.

Finance Minister Rachel Reeves, already facing fiscal strain, may be forced to raise taxes again in the upcoming budget, though she had hoped to avoid this.

"While today's figures are disappointing, I am determined to kickstart economic growth," said Reeves on Friday.

Goods exports to the U.S., Britain’s largest trade partner, dropped sharply in April after surging earlier in the year due to fears over new tariffs. May’s export levels saw only a minor recovery, reverting to figures seen three years ago.

The Bank of England estimates that the UK economy grew by about 0.25% in Q2, but that hinges on stable data for June. If GDP shrinks by 0.4% or more, the quarter could end in contraction.

Despite recent setbacks, some economists see glimmers of hope. KPMG’s Yael Selfin noted that real wage growth and lower borrowing costs may help lift consumer spending later this year.

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