UK GDP Contracts: May Decline Signals Deeper Economic Challenges Amidst Trade Shifts

The United Kingdom’s economic landscape experienced an unanticipated contraction in May, signaling a deceleration from earlier quarterly momentum and diverging from analyst projections. Data from the Office for National Statistics (ONS) revealed a 0.1% month-on-month decline in Gross Domestic Product (GDP), a stark contrast to the 0.1% expansion anticipated by economists polled by Reuters. This downturn follows a more significant 0.3% contraction observed in April, collectively painting a picture of mounting economic challenges.

• UK GDP recorded a 0.1% month-on-month contraction in May, following a 0.3% decline in April.
• April’s economic downturn was influenced by domestic tax increases and new U.S. tariffs.
• The United Kingdom successfully negotiated a comprehensive trade agreement with the United States.
• The robust 0.7% GDP growth from the first quarter is not expected to be sustained.
• The Bank of England projects a modest 1% growth rate for the UK economy in 2025.
• Deutsche Bank has revised down its Q2 and full-year 2025 UK GDP growth forecasts.

The April economic dip was influenced by a confluence of factors, including the introduction of domestic tax increases and the imposition of tariffs by U.S. President Donald Trump on various trading partners. These tariff measures triggered considerable uncertainty across global markets, impacting business confidence and investment. Despite historically maintaining a largely balanced goods trade relationship with the U.S. (while holding a substantial services surplus, per ONS trade data for 2024), the UK was notably subjected to a 10% “reciprocal tariff” from the Trump administration.

Since the initial tariff actions, the United Kingdom has successfully negotiated a comprehensive trade agreement with the United States, becoming the first nation to finalize such a deal amidst ongoing, complex trade discussions between the U.S. and other key partners, including the European Union. This bilateral accord offers a degree of stability for UK businesses navigating the global trade environment. However, this diplomatic achievement has not entirely insulated the domestic economy from internal pressures.

Economic Headwinds and Future Projections

The robust 0.7% GDP expansion recorded in the first quarter, which many economists attributed to a likely front-loading of economic activity ahead of anticipated trade tariffs, is not expected to be sustained in subsequent quarters. The initial estimate for second-quarter (Q2) GDP is slated for release on August 14. Economists broadly anticipate a slowdown in growth throughout the remainder of the year, driven by a weakening jobs market and persistent economic uncertainty. The Bank of England has further tempered expectations, forecasting a modest 1% growth rate for the UK economy in 2025.

Sanjay Raja, Chief U.K. Economist at Deutsche Bank, provided a nuanced perspective on the economic trajectory. While acknowledging a potential marginal monthly improvement in May’s GDP, he underlined significant downside risks to projections for Q2-25 and the full year 2025. Raja noted that the “awful April” GDP print has already necessitated a downward revision of quarterly GDP forecasts. Deutsche Bank’s internal nowcasts now hover closer to 0.1-0.2% quarter-on-quarter, a reduction from their official projection of 0.25% quarter-on-quarter. This adjustment, he stated, also introduces a tenth of a percentage point downside risk to their annual growth projection, bringing it down from 1.2%.

The latest economic data underscores the challenges confronting the UK economy, as it navigates both global trade dynamics and domestic fiscal and labor market conditions. The combined effect of these factors points to a period of subdued growth, requiring careful monitoring by policymakers and market participants alike.