Closing post
Time to recap…
Britain’s economy unexpectedly shrank in May, fuelled by sharp declines in manufacturing and construction.
The Office for National Statistics said gross domestic product fell by 0.1% in May, missing City predictions of a 0.1% monthly expansion. This is the second monthly fall inn a row, driven by a drop in production and construction outout.
Chancellor Rachel Reeves described the drop in output as “disappointing’, saying:
“Getting more money in people’s pockets is my number one mission. While today’s figures are disappointing, I am determined to kickstart economic growth and deliver on that promise.
“The choices we have made in our first year in government have seen us extend the £3 bus fare cap, fund Free School Meals for over half a million more children, press ahead with plans to deliver free breakfast clubs for every child in the country and increase the National Minimum and National Living Wage, giving a pay rise to 3 million workers.
“There’s more to do, that’s why in the Spending Review we boosted investment and jobs, through better city region transport and record funding for affordable homes, as well as backing major projects like Sizewell C.”
Economists suggested that the economy was now suffering the backlash from the jump in activity earlier this year, ahead of Donald Trump’s new tariffs.
The drop in activity puts more pressure on the Bank of England to lower interest rates, some experts suggested.
Rising trade war tensions are threatening to hurt global growth, after Donald Trump announced the US will impose a 35% tariff on imports from Canada from the beginning of August.
News of the plan knocked stock markets. After hitting a fresh intraday high at the start of trading in London, the FTSE 100 share index moved lower – it’s now down 42 points or 0.5% at 8932 points.
Germany’s DAX and France’s CAC are both down almost 1%, while stocks have opened lower on Wall Street too.
The pound has weakened too, touching its lowest level in nearly three weeks against the US dollar, below $1.35.
Have a lovely weekend. GW
May’s unexpected 0.1% decline in GDP will make depressing reading for Rachel Reeves before a tough budget in the autumn, our economics editor Heather Stewart writes.
Stronger-than-expected growth would have helped to alleviate the squeeze on the public finances – but there is nothing in this latest data pointing to an upturn, she points out.
More here:
Wall Street has opened in the red.
A day after hitting record highs, the S&P 500 share index is down 32 points or 0.5% at 6,247 points.
The tech-focused Nasdaq composite index has dipped by 0.36%.
Joshua Mahony, chief market analyst at Rostro, says the growing tariff threat gives investors an incentive to diversify away from US assets.
Mahony says:
Another day, another tariff announcement from Donald Trump, with the President seeking to levy a 35% tariff on their Canadian neighbours on 1 August.
The Canadian reliance on US market exports provides a huge sensitivity to any measures that might damage demand seen from US businesses and consumers. Nonetheless, while we saw a sharp initial pullback for the Canadian dollar, much of the initial move has abated after a US official clarified that items under the USMCA may be exempt.
Mahony adds that fact that Trump is warning of higher tariffs suggests any weakness evident today could be just the beginning…
Bloomberg: Louis Vuitton UK says hackers have stolen some customer data
Luxury fashion group Louis Vuitton has become the latest company to fall victim to cyber-attack.
Bloomberg are reporting that Louis Vuitton UK has said hackers have stolen some customer data.
They explain:
On July 2, an unauthorized third party accessed the systems of the British unit of LVMH Moet Hennessy Louis Vuitton SE’s flagship brand and took information such as names, contact details and purchase history. No financial data like bank details were accessed, the company said in an email to customers on Friday.
“While we have no evidence that your data has been misused to date, phishing attempts, fraud attempts, or unauthorized use of your information may occur,” the email said. The company has notified relevant authorities, including the Information Commissioner’s Office.
Louis Vuitton UK says hackers have stolen some customer data as the luxury brand becomes the latest target in a string of cyberattacks against retailers https://t.co/IdGW402lqQ
— Bloomberg (@business) July 11, 2025
Canada’s jobs markets appears to have shrugged off the threat of a trade war with the US.
The latest Canadian jobs report shows that employment increased by 83,000 (+0.4%) in June and the employment rate rose by 0.1 percentage points to 60.9%. The unemployment rate fell 0.1 percentage points to 6.9%.
WOW 😮 GO Canada 🇨🇦 🎉
— Kathy Lien (@kathylienfx) July 11, 2025
⬆️ +83.1K job added in June (biggest rise this year)
⬆️ Unemployment rate drops to 6.9% from 7%
⬆️ Participation rate rises
⬆️ Almost all part time work but...
⬆️ Full time jobs also increase
Pound at lowest level in nearly three weeks
Sterling is continuing to slide against the US dollar.
It’s now dropped below $1.35, for the first time since Monday 23 June, nearly three weeks ago.
Disappointment over this morning’s GDP report has hit the pound. On the other side of the trade, investors are dropping risky assets and moving into safe-havens.
Kit Juckes, foreign exchange expert at French bank Société Générale, says the reaction to Donald Trump’s trade war threats is “very conventional”, explaining:
That is to say, risk aversion has increased, the US yield curve is steepening, equities are weaker, safe havens are doing well and the dollar is benefiting
Pennon Group, the water company behind last year’s parasite outbreak in Devon, has announced its chief executive is retiring.
Susan Davy is stepping down from Pennon after five years as CEO, during which time it acquired Bournemouth Water, Bristol Water and SES (Surrey and East Sutton) Water.
Davy says
It has been an honour to serve as chief executive officer of Pennon. Running a water company is always interesting, often challenging, but totally fulfilling. I have enjoyed taking responsibility for the provision of a sustainable service to millions of homes. As a long-term resident in the South West of England, our home region, I have been proud to lead the extraordinary team at Pennon whether in the offices, at reservoirs, on the road or in depots.
This is vital work, and our people never shirk from that responsibility. The approval of our investment plans by Ofwat made this a natural juncture to retire from Pennon. This has been my life for the past 30 years, and now it’s right I hand this huge responsibility to the next generation of leaders. I look forward to working closely with David and the Board for the remainder of my tenure.”
Pennon hit the headline last year when South West Water division caused a diarrhoea and vomiting outbreak in Devon caused by polluted water.
There was then a row after Davy received a pay increase of £300,000, taking her annual pay up to £860,000. She did also give up a bonus, meaning her pay was £237,000 lower than it otherwise might have been.
Updated
Following today’s GDP reading, how far down will the Bank of England’s policy interest rate go?
Professor Costas Milas, of the Management School at University of Liverpool, has taken a stab at this poser, telling us:
I have tried to answer this (admittedly) difficult question by looking at the impact of trade uncertainty on the UK economy in an empirical model which looks at the interactions of the BoE’s policy rate, UK inflation, GDP growth and financial pressures.
From the plot below, a trade uncertainty shock raises UK inflation by a total of 0.5 percentage points within four quarters. But as the trade shock takes its toll on GDP growth (the latter drops by a total of 0.8 percentage points within six quarters), the total effect on inflation turns negative two years from now. The BoE responds by lowering interest rates.
Two years from now, Bank Rate is close to 2 percentage points lower than today. The model illustrates of what we could expect in the next two years based on what we know today...
China and the United States have agreed to manage differences while expanding fields of cooperation, according to a Chinese foreign ministry statement on Friday.
The statement comes after a meeting between Chinese Foreign Minister Wang Yi and U.S. Secretary of State Marco Rubio on the sidelines of a regional summit in Malaysia.
Wang told Rubio that China hopes the U.S. will view China with an “objective, rational and pragmatic attitude” and formulate its policy with the goal of peaceful coexistence, the statement added (via Reuters).
Here’s the details of the US trade deficit with Canada that prompted Trump to threaten a 35% tariff on some Canadian goods:
Updated
"After an awful April, we now have maudlin May"
The UK economy’s “Awful April” has been followed by “Maudlin May”, says Michael Browne, global investment strategist at Franklin Templeton Institute.
Following the 0.1% drop in GDP in May, Browne says:
The UK’s latest GDP figures are lower than expected. After an awful April, we now have maudlin May with a second negative figure. If we take a step back and look at the annualised numbers, there has been a sharp fall in growth of the critical service sector.
It’s no surprise to see the retail numbers fall but they are joined by a weak finance sector, and whilst IT is doing its best to hold up the economy, it will struggle as there are precious few signs of growth in other sectors, such as construction, food, hotels, or entertainment.
The message to the [Bank of England’s] MPC is that there is little or no growth in the economy and the catalyst for growth will come from falling interest rates. However, UK rates are falling slowly due to the MPC’s belief that the stimulus from cuts can happen quickly despite the signs saying otherwise.
Updated
Market mood sours as trade war escalates
The mood in the financial markets is souring, as investors ponder Donald Trump’s escalating trade war.
Trump’s announcement of a 35% tariff on Canadian imports has caused some jitters among traders.
Earlier in the week, the talk was that the markets were shrugging off the trade war. Today, though, the UK’s FTSE 100 share index is now down 0.6% or 55 points, at 8920 points, away from its early morning record high.
Germany’s DAX and France’s CAC are now down 1%, on expectations that the EU might receive a letter from Trump soon.
Wall Street is expected to drop 0.6% at the open.
Raffi Boyadjian, lead market analyst at Trading Point, says:
As the week draws to a close, trade tensions continue to escalate, with President Trump being in an uncompromising mood amid the race to secure crucial trade deals ahead of the new deadline of August 1. Despite the frequent citing of progress with major economies such as the European Union, India and Japan, it doesn’t appear that the stumbling blocks are close to being overcome.
Negotiations with Canada, which has its own deadline of July 21, are also not proceeding as Trump would have probably liked, putting the country next in the firing line, following the surprise decision earlier in the week to slap Brazil with 50% tariffs. Newly elected Canadian prime minister, Mark Carney, had been hoping to avoid another standoff with Washington, but that’s not going to be possible now after Trump’s latest announcement.
Updated
The UK economy has been choppy over the last year, as this chart shows:
The National Trust redundancy news will cause “huge worry among staff”, says the Prospect union.
Steve Thomas, Deputy General Secretary of Prospect, says:
“At a time when Prospect members at the National Trust are hard at work welcoming the public to Britain’s historic venues over the busy summer months, this news will cause huge uncertainty and worry for staff.
“We understand the cost pressures the Trust is facing but management decisions, as well as external factors, have contributed to the financial situation and once again it is our members who will have to pay the price.
“Our members are custodians of the country’s cultural, historic and natural heritage - cuts of this scale risk losing institutional knowledge and skills which are vital to that mission.
“Prospect will be working with NT to try to minimise the negative impact of these cuts on both workers and on the operation of the trust.”
National Trust to cut at least 550 jobs after £10m rise in costs from Reeves’s budget
The National Trust is to cut at least 550 jobs in a cost-cutting drive that aims to save £26m after changes made in the chancellor Rachel Reeves’s debut budget pushed up labour costs, my colleague Sarah Butler has learned.
The conservation charity, which looks after 500 historic houses, castles, parks and gardens, said a more than £10m rise in costs in employer’s national insurance and the legal minimum wage in April had outstripped an increase in income from welcoming more visitors.
“Although demand and support for our work are growing with yearly increases in visitors and donations; increasing costs are outstripping this growth,” the group said in a statement.
The cuts will affect 6% of its 11,000-strong workforce, the equivalent of 550 full-time jobs. Staff were informed of the cuts in an online briefing on Thursday, as a 45-day consultation began.
More here:
The Bank of England needs to cut interest rates “before it is too late”, warns Alexandros Xenofontos, economist at City consultancy TS Lombard:
Xenofontos explains:
Savings stay abnormally high - but only the top-income bracket is adding to them; lower and middle earners are already dissaving as essentials bite.
Fiscal drag and still-tight monetary policy offset wage gains; the UK now carries the steepest tax burden in the G7, keeping real-income growth subdued
BoE has little room to stay restrictive as the UK is in danger of remaining in a high-mortgage and high-tax regime.
Britain’s trade with the rest of the world picked up in May.
The ONS reports that total goods exports increased by £900m (3.1%) in May 2025, after inflation, with exports to the EU up £600m and non-EU exports rising by £300m.
William Bain, head of trade policy at the BCC, says UK trade showed “signs of stabilising in May” as the initial impact of higher US tariffs began to subside.
“Goods exports to the US rose by £0.3bn in May after a rollercoaster few months, but export levels are still significantly below where they were six months ago.
“More predictable tariff and trading conditions are key to providing our businesses with certainty. Further implementation of the UK-US deal would enhance those prospects, together with successful negotiations with the EU, and stronger export performance in the Indo-Pacific region. This should include the opportunities of enhanced trade with the CPTPP states and ratification of the trade deal with India.
“If this is combined with a full rollout of the policies from the recent UK Trade Strategy, then businesses will be given the confidence needed to invest and grow their global trade links throughout 2025 and beyond.”
The UK and US agreed a trade deal in early May, but cuts to tariffs on car imports weren’t cut until the end of June.
Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, says the 0.1% fall in GDP is “a far cry” from the stronger growth in Q1 2025, when the UK was the fastest-growing member of the G7.
Nellis says:
Growth over the first half of the year is now expected to be modest. Despite a more positive outlook for the remainder of the year, this presents a challenge to the Chancellor — her fiscal headroom remains limited by high levels of public borrowing and debt and her spending plans are heavily reliant on kickstarting the economy.
Just as last year, we now wait tentatively for the Autumn Budget to find out how the Chancellor aims to solve her fiscal problems.
Scottish start-up to make off-road EVs
Some good news for the economy: A Scottish startup is hoping to manufacture the first cars in the country for more than 40 years, with an electric off-road vehicle that it hopes to beat rivals to market.
Munro Vehicles has said it has orders worth £17m for 246 of its £63,000 all-electric Series-M four-by-fours, which share similar looks to classic Land Rover Defenders.
The company hopes to be the first since the 1980s to mass-produce vehicles in the country, my colleagues Zahra Onsori and Jasper Jolly report.
Scotland’s most famous vehicle was the Hillman Imp, a small car designed to rival the Mini. It was built at Linwood, near Glasgow, but the factory was closed in 1981.
The Munro name refers to mountains in Scotland with a height over 3,000 feet. Munro Vehicles was founded in 2019 by Russell Peterson, 35, and Ross Anderson, 28, and would face a difficult battle to make profits in the car industry dominated by giant companies.
However, the company hopes to steal a march on off-road rivals. Jaguar Land Rover has been relatively slow in creating electric versions of the Defender, despite its “transition into an electric future for all brands”. British billionaire Jim Ratcliffe built the Ineos Grenadier when JLR abandoned its classic design, but he has also focused on petrol and diesel versions, in part because of concerns over the lack of chargers for off-road uses.
Munro has appointed Avinash Rugoobur, a former executive with failed British startup Arrival, to try to make the leap to production.
“All the components are there to ensure success,” said Rugoobur.
“There is a clear need for such a specialist vehicle from customers in industries such as agriculture, emergency response, defence, infrastructure and mining, targeting net zero.”
However, no British startups have succeeded in building electric vehicles at scale. Vehicle company Tevva, who launched their 7.5 tonne battery electric truck in 2023, filed for insolvency last year after being unsuccessful in their attempt to look for investors. Arrival itself entered administration last year despite once being valued at $15bn, highlighting how precarious the EV industry can be for new companies.
Munro delivered four of its first vehicles to customers last year, and said that the vehicle had gone through 18 months of off-road testing and engineering.
Updated
Britain’s computing industry has a good May.
The largest positive contribution to services growth during the month came from the information and communication subsector, which grew by 2.0%.
That included a 3.0% increase in the computer programming, consultancy and related activities industry.
Chart: production sector was main contributor to 0.1% fall in GDP in May
This chart shows how the UK production sector was the main contributor to the 0.1% fall in GDP in May 2025.
Reminder: production output fell by 0.9% in May, while construction output dropped by 0.6% and services sector output rose 0.1%.
Updated
It’s possible, but not likely, that the UK economy will have shrunk in the April-June quarter, say Investec.
Following this data [the 0.1% drop in GDP in May], a contraction in activity in Q2 as a whole is possible, but this is still not our base case.
Thanks to carry-over effects of a strong end to Q1, and assuming no revisions to the back data, activity in June could have contracted by 0.2% on the month and the economy would still have grown in Q2, albeit by only the slimmest of margins.
From there we expect GDP to continue to expand, although we do not imagine the pace of growth will be breaking any records anytime soon.
[We’ll get June’s GDP data, and the full report for Q2, in a month’s time].
Read the full story here
If you’re just tuning in…. Britain’s economy unexpectedly shrank in May, fuelled by sharp declines in manufacturing and construction, in a blow for chancellor Rachel Reeves.
The Office for National Statistics said gross domestic product fell by 0.1% in May, missing City predictions of a 0.1% monthly expansion.
It was the second month of contraction in a row after a 0.3% drop in April as businesses cut jobs and cancelled investment plans in response to higher taxes and uncertainty created by Donald Trump’s tariff war.
The latest figures show declines in construction, oil and gas extraction, car manufacturing and the production of pharmaceuticals outweighed a return to growth in Britain’s dominant service sector.
Manufacturing output had risen sharply in the first three months of the year as businesses rushed to beat the introduction of Trump’s 2 April “liberation day” tariff announcement, fuelling an increase in exports. While a slowdown was likely after US importers filled their inventories, manufacturers have been hit by uncertainty.
PwC: UK could slip down G7 growth rankings
There’s a danger that the UK slides down the G7 growth league table, warns Barret Kupelian, chief economist at PwC, following the fall in GDP in May:
“A single month’s GDP is like a lone brushstroke; it tells you little. However, when paired together with other months, it gives us an indication of the direction of travel for the economy. And that story is beginning to turn sour for the UK.
“Today’s data release showed us that the growth momentum recorded earlier in the year is slowing down rapidly as the economy contracted on a monthly basis for a second time in a row in May (see chart).
“Despite the early May fanfare over the US-UK economic prosperity deal (EPD), output in the car and pharmaceutical industries contracted. Tariff uncertainty still hangs over industry like a stubborn fog. The services sector grew marginally, offsetting some of the negative momentum in the rest of the economy.
“Our main scenario projection before today’s data release showed the UK middle-of-the-pack when ranked amongst the G7 on economic growth for this year, growing at about 1%. Now, with growth momentum rapidly slowing, there’s a genuine risk we slip down the rankings.”
Updated
FTSE 100 index hits new high, as 9,000 point mark
May’s weaker-than-expected growth report has not spooked the City.
Instead, the FTSE 100 blue-chip index has risen slightly, hitting a new intraday high for the second day running.
The FTSE 100 index gained almost 9 points, or 0.1%, to 8984 points, putting the 9,000 points mark in reach for the first time.
Energy giant BP (2.3%) is leading the risers after it reported a rise in oil, gas & low carbon energy production in the last quarter.
ING: UK GDP falls in May amid growing concern about the economic outlook
Analysts at Dutch bank ING say there are “growing concerns” about the UK economy, not helped by the drop in GDP in May.
But…. they also point out that the UK GDP figures have been incredibly volatile this year, and suggest that “May’s decline looks more like noise than signal”.
[Actually, there’s a broader debate on the wisdom of calculating GDP data each month, rather than wrapping the data up each quarter as most other countries do].
James Smith, ING’s developed markets economist, points out that May’s weakness follows a very strong first quarter, when the UK economy grew by 0.7% thanks to tariff frontloading and stronger home sales ahead of the stamp duty change in April.
He adds:
Though it would be wrong to conclude from the GDP data alone that the economy is coming under greater pressure, there are genuine questions emanating from the jobs market and whether it is beginning to fall apart more quickly.
Remember that in May, payrolled employment fell at the sharpest rate outside of the pandemic (the data has been produced since 2014). This data may well be revised up, as is fairly common, but if that doesn’t happen – and indeed if June’s data is as bad as May’s – then it would raise difficult questions for both the Bank of England and the Treasury.
Stride warns of 'ticking tax timebomb'
Shadow chancellor Mel Stride has claimed the UK is facing a ‘ticking tax timebomb’, not helped by the economy shrinking in May:
“Thanks to Labour’s reckless choices the economy actually shrank in May.
“This will pile even further pressure for tax rises in the autumn.
“Labour’s costly U-turns, on winter fuel and welfare, have created a ticking tax timebomb.”
Thanks to Labour's reckless choices the economy actually shrank in May. This will pile on even further pressure for tax rises in the Autumn.
— Mel Stride (@MelJStride) July 11, 2025
Under Labour - taxes hiked, inflation & unemployment up & growth stagnant. We can’t afford Labour. https://t.co/dllo3Zf56i
Bank of England expected to cut rates in August
The drop in GDP in May, and April, will put more pressure on the Bank of England to cut interest rates at its next meeting, in early August.
Richard Flax, chief investment officer at wealth manager Moneyfarm, says:
With inflation continuing to ease and economic momentum faltering, the case for an interest rate cut has strengthened. Markets are now likely to price in a higher probability of a 25 basis point cut, potentially bringing the base rate down from 4.25% to 4.00%.
The BoE may view this contraction as a signal that tight monetary conditions are weighing too heavily on growth.
Deutsche Bank’s Sanjay Raja agrees, predicting a cut in August, and more later this year:
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 in Q4-25.
Suren Thiru, ICAEW economics director, says a rate cut next month is ‘inevitable’:
“The UK’s growth trajectory in the near term is likely to tilt downwards as any uplift from higher consumer and government spending is hampered by escalating business caution, amid fears of further tax rises in this Autumn’s Budget.
“The lack of momentum in the UK economy indicated by these sluggish figures means that an August interest rate cut currently looks inevitable, despite the recent spike in inflation.”
Deutsche Bank: We don't think UK economy is at risk of faltering
Sanjay Raja, Deutsche Bank’s chief UK economist, has some encouraging words for Rachel Reeves.
He told clients this morning that Deutsche Bank does not think the UK economy is at risk of faltering.
He points out that there are encouraging economic signs:
The latest PMI data point to a rebounding economy. Household sentiment is on the rise (albeit gradually). And business sentiment has pushed above its long-run average (see the Lloyds Business Barometer and Deloitte CFO survey). Credit conditions… look steady and healthy.
And some tentative indicators are already pointing to a stabilisation in the labour market (HR1 redundancy notifications, vacancies, and DMP).
Fiscal capex should be pushing through the economy too. And some productivity growth via trade deals with India and the EU (agri-food deal) should pose some upside to supply growth over the next several quarters.
Raja adds that it’s “easy to be pessimistic on the UK economy” after two disappointing monthly falls in GDP, saying:
Certainly, there are big questions on manufacturing – which has been in the doldrums for some time now. Some defence spending should help. But we will need a global manufacturing recovery to kickstart the sector. This is the big unknown for the UK economy.
Big picture, though, it’s also worth taking a big step back: if the economy does indeed slow to 0.1% q/q in Q2-25, this would still mean that the UK economy had grown by 0.8% in the first half of the year, which would still be pretty healthy.
Reeves: Fall in GDP is disappointing
Chancellor Rachel Reeves has described the latest GDP figures as “disappointing”.
Following this morning’s news that the UK economy contracted by 0.1% in May, Reeves points to the government’s efforts to support households financially:
“Getting more money in people’s pockets is my number one mission. While today’s figures are disappointing, I am determined to kickstart economic growth and deliver on that promise.
“The choices we have made in our first year in government have seen us extend the £3 bus fare cap, fund Free School Meals for over half a million more children, press ahead with plans to deliver free breakfast clubs for every child in the country and increase the National Minimum and National Living Wage, giving a pay rise to 3 million workers.
“There’s more to do, that’s why in the Spending Review we boosted investment and jobs, through better city region transport and record funding for affordable homes, as well as backing major projects like Sizewell C.”
[Reminder: economists had expected the UK economy returned to growth in May, but GDP has actually fallen by 0.1% during the month, pulled down by a fall in manufacturing output].
Updated
UK economy shrinks: snap reaction
Economists are rushing to react to the 0.1% drop in UK economic activity in May.
Ben Jones, CBI lead economist, says the UK faces a ‘sluggish recovery’:
“Flatlining growth in May highlights the ongoing pressures facing the UK economy, with manufacturing and retail struggling, alongside a patchy performance across other parts of the services sector.
“Today’s data suggests that a sluggish recovery remains the likeliest path in the near-term amid persistent trade uncertainty, a loosening labour market and slowing growth in real incomes. And with business costs rising, many firms are maintaining a cautious approach to investment.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, fears the UK will record a “shallow contraction” in the second quarter of this year:
“Today’s data confirms that the growth recorded over Q1 2025 was a one-off occurrence, owing to economic activity pulled forward ahead of the US’s “Liberation Day” tariff deadline. Although the UK has struck a trade deal with the US, much of the detail is yet to be sorted out. Meanwhile, the delayed deadline for other countries has only prolonged uncertainties that have impacted UK growth.
“April’s GDP reversal provided clear evidence that there has not been a sustained improvement in economic activity, reinforced by yet another downbeat month which leaves the economy on track for a shallow contraction once June’s data sees the end of Q2.
“The Labour government will be hoping that the UK economy might generate momentum over the second half of the year, perhaps supported by further rate cuts from the Bank of England. However, this hopeful outturn remains uncertain, with growing fears that taxes might be increased again at the Autumn Budget. All hints suggest that the UK economy will suffer a very downbeat year in 2025, before staging a partial improvement in 2026.”
Hailey Low, associate economist at the National Institute of Economic and Social Research (NIESR), fears growth propects are ‘muted’:
Today’s growth figure of -0.1 per cent in May following April’s contraction indicates that the UK’s economic outlook remains fragile. Failure to implement the planned spending cuts has further eroded the UK’s fiscal space and it’s ability to respond to future shocks. Combined with depressed hiring intentions and strained public finances, growth prospects remain muted in the medium term.
With fiscal space increasingly constrained, the Chancellor faces hard trade-offs this autumn budget, having to raise taxes or cut spending to meet her self imposed rules.”
Paul Dales, chief UK economist at Capital Economics, predicts growth will slow sharply this quarter:
If GDP were flat in June, then the 0.7% q/q gain in Q1 would be followed by a 0.1% q/q rise in Q2 as a whole (BoE forecast +0.25%). The underlying pace of growth is somewhere in between.
We think GDP will rise by a fairly subdued 1.0% this year due to the lingering drags from a weakening global economy and the rises in domestic taxes for UK businesses.
Manufacturing output fell, led by pharma and cars
Digging into the GDP report, we can see that UK manufacturing output fell by 1.0% in May 2025, following a 0.7% fall in April 2025.
Manufacturing was the largest contributor to the overall decrease in production output in May 2025, with 9 of the 13 subsectors declining, the Office for National Statistics reports.
There was a 4.2% drop in the manufacture of basic pharmaceutical products and pharmaceutical preparations, following growth of 5.4% in April 2025. This may be because US customers tried to front-run Donald Trump’s trade war earlier this year by importing more pharma products.
The manufacture of transport equipment also fell in May 2025, by 1.3%, following a fall of 5.3% in April 2025. Both monthly declines were largely because of the manufacture of motor vehicles, trailers and semi-trailers industry, the ONS says.
The manufacture of basic metals and metal products also contributed negatively, falling by 1.8% in May 2025.
Today’s GDP report shows that the UK economy grew by 0.5% in March-May, compared to the three months to February.
That was “largely driven by growth in the services sector in this period”.
Updated
Pound weakens after poor GDP report
The pound has dropped against the US dollar, as investors react to this morning’s worse-than-expected GDP report.
Sterling has lost a third of a cent to $1.354, a drop of 0.2%.
ONS: economy still grew over the last three months
ONS director of economic statistics Liz McKeown points out that the UK economy still grew over the March-May quarter:
“The economy contracted slightly in May with notable falls in production and construction, only partially offset by growth in services. However, across the latest three months as a whole, the economy still grew. This reflected strength earlier in the year that resulted, in part, from some activity being brought forward to February and March.
“May’s fall in production was driven by oil and gas extraction, car manufacturing and the often-erratic pharmaceutical industry.
“While services grew overall in May with a strong month for legal firms, which recovered from a weak April, and computer programming, these were partially offset by a very weak month for retail sales.”
Updated
UK GDP: the key chart
UK economy shrinks again in May
Newsflash: The UK economy has shrunk for the second month running, in a blow for chancellor Rachel Reeves.
UK GDP contracted by 0.1% in May, new data from the Office for National Statistics shows, rather weaker than the 0.1% growth expected.
The fall follows a 0.3% drop in GDP in April, and growth of 0.4% in March (revised up from +0.2%).
May’s contraction was driven by a slump in industrial production, and construction work, with modest growth in the services sector.
The ONS reports:
Monthly services output grew by 0.1% in May 2025, following a fall of 0.3% in April 2025 (revised up from a 0.4% fall in our previous publication), and grew by 0.4% in the three months to May 2025.
Production output fell by 0.9% in May 2025, following an unrevised fall of 0.6% in April 2025, but grew by 0.2% in the three months to May 2025.
Construction output fell by 0.6% in May 2025, following growth of 0.8% in April 2025 (revised down from 0.9% growth in our previous publication), but grew by 1.2% in the three months to May 2025.
Updated
Trump threatens 35% tariffs on Canadian goods
Overnight, Donald Trump’s trade war has taken another twist.
The US president has announced his will impose a 35% tariff on imports from Canada next month and threatened to impose blanket tariffs of 15% or 20% on most other trade partners.
In a letter released on his social media platform, Trump told Mark Carney, the Canadian prime minister, the new rate would go into effect on 1 August and would increase if Canada retaliated.
Introduction: UK's May GDP report coming up
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We’re about to discover how the UK economy fared in May, the month in which Britain became the first country this year to agree a trade deal with Donald Trump.
Economists predict the UK economy grew slightly in May, by 0.1%, after a disappointing 0.3% contraction in April.
The government will be hoping for signs that activity picked up in May, given the push for growth. The data is due at 7am UK time.
Victoria Scholar, head of investment at interactive investor, says:
April’s decline was caused by a drop in legal activities linked to the stamp duty increase. Plus, higher energy bills, the National Insurance increase and tariff uncertainty took their toll.
After an unfortunately timed cluster of headwinds in April, it appears as though the only way is up. Consumer sentiment is already showing signs of improvement and Friday’s GDP data could add to the cheerier mood, with the potential for a rebound in activity, particularly in the key services sector. Plus, anticipation of easier monetary policy is helping to boost sentiment and the real economy. The Bank of England lowered interest rates in May with the market anticipating two more cuts this year.”
The agenda
7am BST: UK GDP report for May
7am BST: UK trade balance for May
9am BST: IEA’s monthly oil market report
2pm BST: Russia’s trade balance for May
Updated
