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The UK financial system unexpectedly contracted 0.1 per cent in Might, the second month-to-month decline in a row, in an indication that the sturdy progress seen earlier within the 12 months has dissipated.
Friday’s determine from the Workplace for Nationwide Statistics adopted a contraction of 0.3 per cent in April and was nicely under the 0.1 per cent progress forecast by economists polled by Reuters.
Might’s decline, pushed by falls in manufacturing and building, factors to a pointy slowdown within the second quarter after the speedy progress of 0.7 per cent within the first three months of the 12 months.
The pound fell 0.2 per cent in opposition to the greenback to $1.35 following the info launch.
Professor Joe Nellis, financial adviser at accountancy and advisory agency MHA, mentioned the determine was “a far cry” from the primary quarter, when a surge in exports and a sturdy efficiency within the companies sector positioned the UK among the many G7’s prime performers.
“Development over the primary half of the 12 months is now anticipated to be modest,” mentioned Nellis. “This presents a problem to the chancellor — her fiscal headroom stays restricted by excessive ranges of public borrowing and debt and her spending plans are closely reliant on kick-starting the financial system.”
The Labour authorities’s pledge to revive progress is central to funding chancellor Rachel Reeves’ spending plans, as she battles to fill a fiscal gap that economists say may very well be greater than £20bn.
However the Financial institution of England has warned that underlying progress stays weak, including that financial exercise within the first quarter was boosted by one-off elements, similar to frontloading actions forward of US tariffs and modifications to stamp obligation.
Reeves mentioned on Friday that the Might GDP determine was “disappointing”, including that she was “decided to kick-start financial progress”.
Suren Thiru, economics director on the Institute of Chartered Accountants in England and Wales, mentioned: “These downbeat figures undoubtedly enhance anxiousness over the well being of the UK financial system.”
He added that an August charge minimize from the BoE, which held borrowing prices at 4.25 per cent final month, “presently appears to be like inevitable”.
Following the info launch, buyers barely elevated their bets on a quarter-point August minimize. The market expects two reductions by the tip of the 12 months.
ONS director of financial statistics Liz McKeown mentioned Might’s contraction had been pushed by “notable falls in manufacturing and building, solely partially offset by progress in companies”.
She added that the manufacturing decline centred on “oil and fuel extraction, automobile manufacturing and the often-erratic pharmaceutical trade”.
Paul Dales, economist on the consultancy Capital Economics, calculated that even when GDP improved to a flat studying in June, progress would nonetheless have slowed to simply 0.1 per cent general within the second quarter.
“The hangover from the burst of exercise in Q1 continued in Might,” he mentioned, including that he expects “pretty subdued” progress this 12 months “as a result of lingering drags from a weakening world financial system and the rises in home taxes for UK companies”.
Development was revised to 0.4 per cent in March, up from 0.2 per cent of preliminary estimates, boosting the enlargement within the three months to Might to 0.5 per cent, in contrast with the earlier three months.
However McKeown mentioned this mirrored “energy earlier within the 12 months that resulted, partially, from some exercise being introduced ahead to February and March”.
The gloomy progress figures will forged a pall over a cupboard “away day” convened by Prime Minister Sir Keir Starmer on Friday, at which ministers will attempt to map a path via a worsening fiscal outlook in direction of the autumn Price range.
Shadow chancellor Sir Mel Stride mentioned: “Due to Labour’s reckless decisions the financial system really shrank in Might. It will pile even additional stress for tax rises within the autumn. Labour’s expensive U-turns, on winter gasoline and welfare, have created a ticking tax time bomb.”
Ministers on the away day will assess the harm brought on to the general public funds by the retreats over welfare reform and winter gasoline funds, which have blown a gap of greater than £6bn within the authorities’s fiscal plans.
Enterprise leaders are warning Reeves in opposition to additional weakening progress by making an attempt to shut that hole by hitting enterprise and the Metropolis of London with greater taxes.
Ben Jones, CBI lead economist, mentioned: “With rising fiscal challenges and the autumn Price range on the horizon, the chancellor should present clear reassurance — no new taxes on enterprise and as an alternative provide a dedication to work alongside companies to dismantle limitations to progress.”
