Britain’s economic recovery suffered a setback in April, with gross domestic product (GDP) shrinking by 0.3% on a monthly basis, marking the steepest contraction since October 2023, according to data released by the Office for National Statistics (ONS) on Thursday.
The contraction, which exceeded market expectations of a 0.1% fall, has renewed concerns over the UK economy’s resilience and intensified pressure on both Downing Street and the Bank of England (BoE)’s policy stance.
The April downturn followed a modest 0.2% expansion in March and comes amid a broader backdrop of weakening labour market data and fading consumer momentum.
Services sector leads contraction
The services sector, which accounts for around 80% of UK economic output, was the primary drag in April, declining by 0.4%.
Within services, the professional, scientific and technical activities subsector posted a significant fall of 2.4%. This contraction was driven mainly by a 10.2% plunge in legal activities, attributed in part to the impact of changes to Stamp Duty Land Tax thresholds in England and Northern Ireland.
The tax change prompted homebuyers to bring forward purchases to March, resulting in a sharp drop in related services, such as conveyancing and estate agency work, in April.
Advertising and market research also contributed negatively to GDP, with output down 3.4%, while growth in scientific research and development (up 6.7%) provided a partial offset.
The wholesale and retail trade and repair of motor vehicles and motorcycles subsector also weighed on GDP, declining by 1.2% in April after a 0.9% expansion in March.
Industrial weakness deepens, labour market shows signs of strain
Production output fell by 0.6% in April, with manufacturing production sliding 0.9% — adding to a 0.8% fall in the previous month.
Overall industrial production contracted by 0.6%, coming in weaker than the 0.5% decline expected by analysts.
Despite a rebound in construction output, which rose 0.9% month-on-month, it was not enough to counterbalance the broader economic dip.
The downturn in GDP comes on the heels of deteriorating labour market data released earlier this week.
The number of payrolled employees fell by 109,000 in May, the seventh consecutive monthly decline and the sharpest drop since May 2020. The total stood at 30.2 million, a 0.4% monthly fall.
The unemployment rate ticked up to 4.6% in the three months to April, in line with expectations, while wage growth softened.
Regular pay excluding bonuses increased by 5.2% year-on-year — the slowest pace in seven months and below the 5.4% forecast.
Monetary policy outlook
Despite the mounting economic headwinds, the BoE is widely expected to leave interest rates unchanged at 4.25% at its upcoming meeting next week.
However, traders have increased their bets on a rate cut in August, anticipating a 0.25 percentage point reduction as the economy shows further signs of cooling.
Overall, money markets are currently pricing two interest rate cuts of cumulative 50 basis points by the BoE this year.
Market reactions: Pound drops
Sterling came under pressure following the GDP release, with the euro rising to 0.85 pounds — the highest level in over a month during morning trading.
UK government bond yields extended their weekly declines. The yield on the two-year gilt fell to 3.90%, the lowest since early May, while the ten-year yield slipped to 4.53%.
Equity markets, however, remained broadly resilient. The FTSE 100 held steady around 8,860 points, just shy of Wednesday’s all-time high of 8,885.
Among the notable movers, Halma plc surged over 8% on the back of strong corporate results. BP also gained 1.8%, buoyed by higher oil prices following the announcement of a trade agreement between the United States and China. On the downside, Intermediate Capital Group and EasyJet dropped 4.1% and 2.6%, respectively.
