Gross domestic product shrank by 0.1% after a 0.3% drop in April, the Office for National Statistics said.

International News via Reuters:

Britain’s economy contracted unexpectedly for a second month running in May, official data showed on Friday, compounding worries at home for finance minister Rachel Reeves as the nation navigates growing global turbulence. 

Gross domestic product shrank by 0.1% after a 0.3% drop in April, the Office for National Statistics said.

Economists polled by Reuters had mostly forecast that gross domestic product would rise by 0.1% from April’s level. And while the services sector eked out a sliver of growth, declines in industrial output and construction dragged down overall output.

Following a growth surge early in the year, Britain’s economy could now be facing flat or weaker growth than previously expected for the April-to-June period, economists said.

Friday’s data now adds to expectations the Bank of England will cut interest rates next month.

“The lack of momentum in the UK economy indicated by these sluggish figures means that an August interest rate cut currently looks inevitable, despite the recent spike in inflation,” said Suren Thiru, economics director at accountancy body ICAEW.

Prime Minister Keir Starmer’s Labour government has struggled to improve growth meaningfully in its first year, with a tax hike on employers and U.S. President Donald Trump’s trade wars weighing on the economy.

Britain’s goods exports to the United States – its single-largest export destination – surged earlier this year as U.S. importers rushed to beat the imposition of Trump’s tariffs.

But they fell sharply in April. And trade data published on Friday showed only a slight recovery to around 4.4 billion pounds ($6.0 billion) in May, bringing export levels back down to where they were roughly three years ago.

Economists say it looks increasingly likely Reeves will need to raise taxes again in her next budget – something she had hoped to avoid.

“While today’s figures are disappointing, I am determined to kickstart economic growth,” Reeves said of Friday’s data.

Britain’s economy expanded rapidly in the first quarter of 2025, outstripping growth in other countries in the Group of Seven advanced economies. In May the Bank of England revised up its full-year growth forecast to 1%.

However, much of the growth in early 2025 was likely linked to the expiry of a tax break for some home purchases in April, which boosted the sector before the deadline, as well as a rush by manufacturers to beat higher U.S. import tariffs.

The BoE has said it thinks the economy grew by about 0.25% in the second quarter of 2025.

After Friday’s May figures, June’s monthly data will need to show at least a flat reading, assuming no revisions to earlier months, in order to achieve any growth for the quarter, the ONS said.

A month-on-month contraction of 0.4% or worse for June would herald a quarterly contraction.

“The second straight decline in monthly real GDP in May will increase concerns that the government’s growth plan has been derailed by external and domestic shocks,” said Raj Badiani, economics director, Europe, at S&P Global Market Intelligence.

Yael Selfin, chief economist at KPMG UK, said she expected the economy to have remained flat in the second quarter, but spending by households might now be picking up now.

“With wage growth remaining ahead of inflation and borrowing costs set to ease further, a modest pick-up in consumer spending could be on the cards in the second half of the year,” she said.

($1 = 0.7386 pounds)

Graphic by Andy BruceEditing by William Schomberg, William James, Sharon Singleton and Joe Bavier

The pound weakened 0.26% to $1.354, while against the euro it slipped 0.2% to 86.35 pence

International News via Reuters:

Sterling slipped on Friday and was trading close to a more than two-week low after data showed the UK economy contracted for the second month, boosting expectations that the Bank of England could lower borrowing costs next month.

Gross domestic product shrank by 0.1% after a 0.3% drop in April, the Office for National Statistics said, primarily dragged by weakness in industrial and construction output.

“Though it would be wrong to conclude from the GDP data alone that the economy is coming under greater pressure, there are genuine questions emanating from the jobs market and whether it is beginning to fall apart more quickly,” said James Smith, an economist at ING.

“For the (BoE), it would likely force a rethink on the pace of rate cuts. Until now, officials have appeared highly reluctant to move beyond their recent, gradual once-per-quarter cutting pace.”

The pound weakened 0.26% to $1.354, while against the euro it slipped 0.2% to 86.35 pence.

Yields on short-term gilts, often a reflection of interest rate expectations, were steady after easing about two basis points earlier in the day.

Traders are now pricing in a 78.3% chance the BoE could deliver a 25-basis-point interest rate cut in August, versus the 64% probability they were pricing in two weeks ago, data compiled by LSEG showed.

Friday’s data adds to worries for finance minister Rachel Reeves, with economists saying it looks likely she will need to raise taxes again in the upcoming Autumn budget as the government strives to balance its public accounts.

UK markets took a beating last week after the Labour government was forced to pass a highly contested welfare bill that did little to make good on the spending cuts initially hoped for and heightened the uncertainty regarding the sustainability of government finances.

Globally, investors were rattled by U.S. President Donald Trump’s latest tariff escalation as he said he would impose a 35% rate on Canadian imports next month, while other trading partners are likely to face blanket levies of 15% or 20%.

The pound firmed 0.5% against the Canadian dollar and last fetched C$1.855.

Analysts have said that Britain’s deal with the U.S. has made it less exposed to uncertainty on the trade front, which was also reflected in the pound’s 8% rise against the U.S. dollar so far this year.

Reporting by Johann M Cherian; Editing by Emelia Sithole-Matarise