The winds of ill fortune buffet the U.K. economy at every turn. In May, it contracted for the second consecutive month, with a 0.1% contraction in GDP building on a 0.3% contraction in April. This is a pretty disappointing performance given the small rebounding. It poses big questions for long-term economic prosperity as we face a new normal of uncertainty and risk.
The GDP has retreated largely as a result of very poor performance in manufacturing production, which was down 0.9%. Construction took a hit as well, sinking by 0.6%. Despite these reversals, a number of analysts had expected a third consecutive gain in May’s GDP to be fairly gentle. Sanjay Raja, chief U.K. economist at Deutsche Bank, noted, “The ‘awful April’ GDP print sets us back a tenth on our quarterly GDP projection.” This creates a negative risk bias to year-over-year growth forecasts, he said.
The U.K. has recently negotiated a trade agreement with the U.S. which even the U.K. government concedes keeps the current, even-handed flow of goods entirely unchanged. For the U.K., it’s a huge services surplus with its American twin. The recent addition of a 10% “reciprocal tariff” under the Trump Administration adds another layer of complexity to this relationship. This tariff still looms large over the direction of trade today.
As the U.K. navigates these challenges, forecasts from the Bank of England suggest a modest growth rate of 1% for the year 2025. Worries are increasing over weaker growth for the remainder of the year. This is largely attributable to a cooling jobs market and persistent economic uncertainty. Sanjay Raja expressed these sentiments, stating, “Where to next? Relative to our baseline projections, downside risks have emerged around our Q2-25 and 2025 annual projections.”
For the first quarter, U.K. GDP growth soared by a surprising 0.7%. This increase was probably driven by companies increasing production in preparation for soon-to-happen trade tariffs. This rapid expansion has not been enough to maintain that growth month-over-month. The first estimate of the U.K.’s second quarter (Q2) GDP will be published on August 14. This report should provide an illuminating view into a vastly changed economic landscape.
At the same time, Finance Minister Rachel Reeves has made restoring the country’s economic growth and getting the country’s budget deficit under control her main goals. As the U.K. continues to grapple with these economic hurdles, stakeholders remain vigilant about the potential impact of forthcoming trade agreements, particularly as the European Union awaits to sign its own deal with Washington.