UK Economy Shrinks by 0.3% in April Amid Tax Hikes and Trump’s Escalating Trade War

The UK economy contracted by 0.3% in April 2025 — marking its sharpest monthly decline since November 2022, according to data released by the Office for National Statistics (ONS). The slowdown comes in the wake of broad tax increases implemented by the British government and the intensifying trade war with the United States, as the Trump administration imposed new tariffs on British exports.

Services, Manufacturing, and Construction: A Triple Blow

The downturn affected all three major sectors of the UK economy. The services sector — which accounts for approximately 79.2% of the UK’s GDP — shrank by 0.2%. Within it, sub-sectors like retail trade, transportation, and tourism recorded respective declines of 0.6%, 0.4%, and 1.1%. A drop in household consumption, driven by inflation and higher taxes, has made the services industry particularly vulnerable.

The manufacturing sector contracted by 0.9%, the steepest monthly drop since January 2023, with machine tools and equipment down 1.3%, and the automotive industry sliding 1.7%. According to ONS data, export-oriented industries affected by new US tariffs saw revenues fall by over 5.5% compared to March.

The construction sector — which makes up about 6.2% of GDP — also declined significantly, with a 1.4% monthly decrease. This was largely due to the suspension of new infrastructure projects in London and northern England, as rising VAT and corporate tax rates deterred public and private investment.

UK–US Trade War: Tariffs Hit British Exporters

The escalation of US trade policy under President Donald Trump in April included 15%–25% tariffs on a broad range of UK goods, including technology components, medical equipment, advanced materials, and alcoholic beverages. As a result, UK exports to the United States — Britain’s second-largest export market after the EU — fell by 5.2% in April, totaling £4.89 billion, down from £5.16 billion in March.

UK industry groups, led by the UK Exporters’ Forum, warned of “mass layoffs” across sectors heavily reliant on the American market, with many firms already seeking to redirect their output toward domestic demand or alternative trading partners.

Tax Hikes Weigh on Domestic Growth and Consumption

A series of tax increases came into effect in April, including a rise in the corporate tax rate from 25% to 28%, and a VAT increase from 20% to 22% on selected goods and services. At the same time, tax relief for middle-income households was reduced, adding further pressure on consumer spending.

According to analysis by the Institute for Fiscal Studies (IFS), UK households spent 3.8% less on average in April compared to the same month last year. The decline was especially pronounced among consumers aged 30–45 — a demographic with traditionally high consumption levels. Private investment also dropped by 0.6% in April, as fears of a global slowdown and future austerity dampened investor sentiment.

Labour Market and Inflation: Troubling Stability

Unemployment remained stable at 4.3% in April, but the number of new jobs created fell by 22,000 compared to March. Manufacturing and retail sectors saw a sharp drop in demand for workers, with major employers like Tesco and Rolls-Royce reportedly freezing new hires.

Meanwhile, inflation held steady at 3.4% year-on-year, well above the Bank of England’s 2% target. This constrained the Bank’s ability to lower interest rates, currently at 4.25%, despite signs of weakening demand. The resulting policy dilemma pits the need to stimulate growth against the imperative to maintain price stability.

Outlook: Warning Signs of Recession, Hopes for Policy Reversal

While the Treasury maintains a forecast of 0.8% GDP growth for 2025, economists at Barclays and Deutsche Bank now warn that the UK may enter a technical recession as early as Q2 if the contraction continues into May and June.

The Bank of England is set to announce its next interest rate decision at the end of June. In the meantime, pressure is mounting from business leaders and opposition MPs to ease the tax burden and implement gradual monetary easing. Still, the Treasury maintains that “rash policy shifts may undermine long-term fiscal credibility.”

Conclusion: UK Economy at the Crossroads of Domestic Austerity and External Pressures

April’s 0.3% contraction highlights how vulnerable the UK economy has become to the intersection of strict domestic fiscal policies and a shifting global trade environment. Tax increases have stifled local demand, while Trump’s tariffs are beginning to erode Britain’s export base.

The key question is whether this is a temporary dip or the onset of a prolonged downturn. Without a shift in fiscal stance or de-escalation in the trade conflict, the UK could face a sustained period of stagnation, with a real risk of entering technical recession already looming over the second quarter.