A modest 0.1% expansion was expected, although tariffs and tax increases continue to hamper growth.
ADVERTISEMENT
The UK economy contracted by 0.1% in May, following a drop of 0.3% in April, the Office for National Statistics said on Friday.
The pound fell around 0.2% against the dollar to $1.35 after the announcement.
The figures come as an unexpected blow to the UK’s Labour government, which has made boosting growth a pillar of its political agenda. Economists had predicted a 0.1% expansion for May.
Labour’s move to increase payroll taxes earlier this year has been blamed for reduced hiring, while tariff threats from the US administration are also sowing uncertainty and dampening spending appetites.
The UK saw an uptick in gross domestic product (GDP) in February and March, although the Bank of England warned that this was down to temporary factors, rather than strength in the underlying economy.
For example, a hike in Stamp Duty, a tax on property or land purchased, meant that buyers rushed to make their purchases before the end of March. Exporters also rushed to ship goods in an attempt to prepare for upcoming US tariffs.
May’s contraction was largely driven by a 0.9% fall in production output. Construction was down 0.6%, while services grew by a meagre 0.1%.
In April, production fell by 0.6%, construction grew 0.8%, and services dropped 0.3%.
“Growth is becoming incredibly difficult to achieve for the government, and the plans put in place so far are unlikely to move the needle in the absence of improving business and consumer sentiment in an environment of ongoing cost pressures,” said Lindsay James, investment strategist at Quilter. “The choices are tough and stark, and until we see an end to the persistent tax rises, inflation returning to target and interest rates falling more meaningfully, improvements will be minimal.”
The Bank of England held interest rates at 4.25% last month, although markets are predicting a 25-basis-point cut at its next meeting on 7 August.