The UK economy unexpectedly contracted by 0.1% in May 2025, according to fresh data released by the Office for National Statistics (ONS) on July 11. This follows a sharper 0.3% decline in April, reinforcing concerns that Britain’s post-pandemic recovery remains fragile and vulnerable to global shocks. The figures fall short of Reuters’ consensus forecast for a modest 0.1% growth, signaling a clear deviation from policymakers’ expectations.

Second Consecutive Monthly Contraction: Noise or New Trend?
Two back-to-back months of GDP decline mark the first such occurrence since early 2023, breaking the momentum of the stronger-than-expected 0.7% GDP growth in the first quarter of 2025. Economists now believe that Q1 growth was artificially front-loaded, as businesses rushed activity ahead of U.S. tariffs announced by President Trump. Without that temporary stimulus, underlying economic weaknesses are resurfacing.

Sector Breakdown: Manufacturing and Construction Drive the Downturn
The negative print in May was driven by a 0.9% drop in manufacturing output and a 0.6% decline in construction. These sectors are highly sensitive to both domestic investment confidence and external demand. Manufacturing has struggled under the weight of global supply chain disruptions and volatile input costs, while construction has cooled due to higher interest rates, tighter credit conditions, and waning housing demand. Services output—comprising nearly 80% of the UK economy—was relatively flat, but not strong enough to offset weaknesses in goods-producing sectors.

External Pressures: Trump’s Tariff Policy and “Reciprocal Response”
Adding to the domestic drag, Britain has also felt the impact of the global trade realignment triggered by U.S. tariff policies. Despite a broadly balanced trade relationship in goods, the U.S. imposed a 10% tariff on UK imports in March 2025 as part of a wider campaign against trade partners and rivals alike. The UK responded in kind with reciprocal tariffs on U.S. goods. This escalation has created uncertainty for exporters, particularly in industrial and chemical goods, while dampening business sentiment.

Trade Agreements and Lingering Friction
In April, the UK became the first nation to sign a bilateral trade deal with the U.S. under Trump’s new trade framework. While the agreement offers a degree of long-term clarity, many key sectors remain exposed to unilateral tariff changes and sector-specific limitations. Meanwhile, negotiations between the EU and the U.S. remain stalled, positioning the UK in a limbo—no longer part of the EU trade bloc, but still navigating new rules with its largest non-EU partner.

Fiscal Challenges for the New Chancellor
Chancellor Rachel Reeves, appointed earlier this year, had pledged to reinvigorate the economy and reduce Britain’s fiscal deficit. However, the dual hit of weaker GDP and lower-than-expected tax revenues could derail these objectives. Reeves’ budget included local tax hikes to support public spending, but these measures may now face political and economic resistance as growth slows.

Rising Market Bets on a Rate Cut in August
Amid the economic slowdown, financial markets are increasingly pricing in a Bank of England interest rate cut at the upcoming August policy meeting. According to futures data, there is now an 80% probability of a 25 basis point reduction from the current 4.25% rate. The central bank has already eased from 5.25% over the past year, albeit more slowly than its European counterparts. The ECB, by comparison, has lowered rates from 4% to 2% over the same period.

Inflation Risks Persist but Momentum Shifts
Despite recent upticks in inflation—now again above 3%—the BOE may be compelled to ease policy due to deteriorating growth conditions. Soren Thiru, head of economics at the ICAEW, said in a Friday note that “a rate cut in August now appears inevitable” given the contraction in output, especially in construction and manufacturing. Governor Andrew Bailey previously told CNBC that rate policy would continue to “ease gradually,” while declining to confirm any decision for August.

Q2 Growth Forecasts Slashed: 0.1% or Less Expected
Initially, Q2 growth was expected to land at 0.25%, but following May’s contraction and weak industrial sentiment in June, forecasts are being revised downward. Deutsche Bank’s Sanjay Raja stated that 0.1% now seems more realistic and that a negative quarter “cannot be ruled out.” However, he also pointed to some resilience in consumer sentiment, stable credit conditions, and supportive PMI data as reasons for cautious optimism.

The Global Factor: Manufacturing Recovery Is the Key
Perhaps the most important unknown for the UK outlook is the global manufacturing cycle. As a highly trade-exposed economy, the UK depends on healthy external demand—especially from the U.S., Europe, and Asia. Without a broad-based industrial rebound, the UK’s own output will remain constrained. Raja emphasized this point, stating that “a global recovery in manufacturing is the big unknown for the UK economy.”

Macro Landscape: Structural Fragility Meets Policy Limits
The UK economy is grappling with a difficult mix: external shocks from global trade tensions, lingering structural weaknesses in productivity and investment, and diminishing monetary headroom for central bank support. The challenge for policymakers is to restore confidence without overstimulating in an environment where inflation still exceeds the 2% target.

Conclusion: Recovery in Question, BOE in Focus
May’s GDP figures underscore the fragility of Britain’s post-pandemic recovery. With key sectors in retreat and political tensions abroad fueling economic headwinds, the burden now falls on the Bank of England to support growth without igniting inflation. The August rate decision will be pivotal. But longer-term, real progress will depend on trade stability, reenergized investment, and a global rebound in manufacturing demand.