LONDON (Realist English). The British economy unexpectedly contracted in May, with fresh data from the Office for National Statistics (ONS) showing a 0.1% decline in monthly GDP. The result defied analyst expectations of a 0.1% expansion and underscored the drag from global trade tensions and domestic policy shifts.
The contraction was led by a 0.9% drop in industrial production and a 0.6% fall in construction output. The figures mark a second consecutive monthly decline, following April’s 0.3% contraction when new tax hikes came into effect and U.S. President Donald Trump imposed sweeping tariffs on trade partners, including the U.K.
Despite signing a bilateral trade agreement with Washington—becoming the first country to do so under Trump’s new tariff regime—Britain was not spared. A 10% “reciprocal tariff” on U.K. goods has added to business costs, with limited relief from its services trade surplus with the U.S., which remains unaffected.
The slowdown poses a political challenge for newly appointed Finance Minister Rachel Reeves, who has prioritized economic recovery and deficit reduction. The surprisingly weak May data also casts doubt on the sustainability of the first quarter’s 0.7% growth surge, which many analysts attributed to companies frontloading activity ahead of the tariff hike.
Economists now expect U.K. growth to decelerate through the second half of 2025. Deutsche Bank’s Sanjay Raja revised his Q2 GDP forecast to just 0.1%, down from 0.25%, and warned that manufacturing recovery remains a critical unknown. Meanwhile, the Bank of England’s official forecast points to sluggish 1% growth for the full year.
In response to the weak economic outlook, markets now price in an 80% chance of an interest rate cut at the BoE’s August meeting. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, described a rate cut as “inevitable,” citing deepening concerns over declining output.
The BoE has already eased its benchmark rate from 5.25% to 4.25% over the past year, though it remains more cautious than the European Central Bank, which cut rates to 2%. BoE Governor Andrew Bailey recently confirmed that rates will continue on a “gradual downward path,” though he declined to pre-commit to an August move.
Despite near-term weakness, some indicators remain supportive. Consumer and business sentiment have improved, credit conditions are stable, and services output continues to offset manufacturing weakness.
Still, with external demand subdued and geopolitical risks clouding the horizon, a full recovery may hinge on a global manufacturing rebound—something analysts say remains far from guaranteed.
