The UK economy contracted by 0.1 percent in May, according to the Office for National Statistics, following a 0.3 percent drop in April and falling short of consensus forecasts for a modest rebound. The back-to-back declines underscore persistent weakness in manufacturing and construction, which together outweighed a slight improvement in services output.
According to seasonally adjusted figures, monthly GDP fell despite services — the largest part of the UK economy — growing by 0.1 percent. Legal activities jumped 6.1 percent, and the information and communication sector rose 2 percent, driven by increased demand for software and IT consulting. However, these gains were not enough to offset a sharp 0.9 percent decline in industrial production and a 0.6 percent drop in construction, which reversed April’s weather-related gains. New-build housing and infrastructure projects slowed notably.
“Today’s figures underline the need to unlock investment and productivity,” said Chancellor Rachel Reeves, reaffirming government plans for an autumn budget focused on housing and green technology investment.
Market reaction was swift. Sterling slipped approximately 0.2 percent to $1.3550 against the dollar, while the FTSE 100 remained close to its record high as a weaker pound offered some support to large exporters. Analysts highlighted that the data missed market expectations — economists polled by Reuters had forecast a 0.1 percent rise, with a range from -0.2 to +0.3 percent.
Despite the monthly weakness, GDP was 0.7 percent higher than a year earlier, and output across March to May rose by 0.5 percent compared with the previous three months. All major sectors contributed positively over the quarter. However, the two consecutive monthly declines place the Bank of England’s assumption of 0.25 percent quarter-on-quarter growth for Q2 in doubt. The central bank now requires flat output in June to meet its forecast — a scenario which, if missed, could push the UK close to a technical recession ahead of the government’s planned autumn budget.
Sector-specific drivers weighed heavily on May’s figures. Oil and gas extraction and car manufacturing posted the steepest drops in production. In consumer services, retail activity fell by 2.7 percent, leading to a 1.2 percent decline in consumer-facing services, attributed to softer retail sales and reduced leisure demand. Conversely, legal services rebounded after stamp-duty changes in April, and IT consulting remained a bright spot.
Looking ahead, the Bank of England is expected to closely watch June’s output data, with the market now increasingly pricing in a potential rate cut in August. The Bank Rate stands at 4.25 percent. On the policy front, Chancellor Reeves reiterated that driving investment and productivity remains a priority, though the latest contraction challenges Labour’s target to outpace other G7 economies by 2026 and narrows fiscal headroom for new spending.
Manufacturers cited ongoing uncertainty around potential US tariffs and the impact of April’s National Insurance rise as factors weighing on hiring and output.
