The UK economy has unexpectedly contracted for a second month in a row, bringing serious concern to Chancellor Rachel Reeves. GDP dropped by 0.1% in May 2025, having dipped 0.3% the previous month. The unexpected downturn adds more pressure to the Labour government to reverse growth and soothe public finances.
/*May's Surprise Contraction*/
Britain's economy declined by 0.1% in May 2025, the Office for National Statistics (ONS) confirmed, defying forecasts of anaemic growth. Important sectors: manufacturing, oil and gas extraction, construction, and retailing all recorded severe drops, but legal services and computer programming registered modest increases. ONS Director Liz McKeown said that earlier activity had been pushed into March, which cushioned the three-month figure, but May was affected by delayed output. While it dropped in a month, the economy still grew 0.5% during the quarter to May.
/*Chancellor's Disappointment and Political Fallout*/
Chancellor Rachel Reeves called the figures "disappointing" in public, reiterating her mission to "put more money in people's pockets" and kickstart economic growth once again. But opposition parties and business bodies are not so sure. Shadow Chancellor Mel Stride attacked Labour's spending plans as a "tax timebomb of recklessness" and threatened future tax hikes later in the autumn. These concerns were reiterated by the Confederation of British Industry (CBI), which urged the government to avoid new business taxes and instead cooperate with businesses to drive productivity.
/*Historical Context and Policy Pressure*/
The poor May performance follows the March Spring Statement, when Reeves outlined cost-of-living help, welfare reform, and reforms to business taxation. GDP was down 0.3% in April, in part due to firms bringing forward activity ahead of expected US tariff action. While early export sprees boosted Q1, Q2 is now starting to suffer. Production continues to be weak despite the suspension of tariffs.
/*Market Reaction and Financial Implications*/
Markets also reacted swiftly. The pound dropped to a near-three-week low versus the dollar, and investors now strongly expect the Bank of England to cut interest rates in August, possibly cutting the base rate from 4.25% to 4.0%. The Office for Budget Responsibility (OBR) has warned of a potential £20 billion budget deficit, triggering speculation about tax increases or spending restraints in the upcoming autumn budget (FT).
/*Looking Ahead: Stakes and Strategies*/
The economic and political stakes are high. The chancellor now must get the economy back on track, as inflation fears, increasing public debt, and business confidence are looming in the background. Pundits argue that a shift toward greater investment, expenditure on infrastructure, and focused tax cuts could be needed to restart momentum.