On July 11, 2025, the Office for National Statistics (ONS) reported that the UK economy contracted by 0.1% in May, marking a second consecutive month of decline following a 0.3% drop in April. This unexpected downturn has stunned economists and media experts, who widely anticipated a modest 0.1% expansion. The failure to predict this contraction raises serious questions about the foresight of economic analysts, particularly in light of mounting pressures from domestic policies and global uncertainties. This article examines the reasons behind the GDP fall, with a focus on Chancellor Rachel Reeves’ budget, and highlights why the quarterly GDP figures may be overstated due to significant ONS adjustments.
A Missed Forecast: Why Economists and Media Got It Wrong
The consensus among City economists, as reported by Reuters, was for a slight rebound in May, with expectations of 0.1% growth following April’s contraction. Yet, the ONS data revealed a continued decline, catching analysts off guard. Posts on X echoed this sentiment, with some users arguing that the shrinkage was foreseeable given the economic headwinds. One user remarked, “Nobody in business believes the U.K. economy ‘unexpectedly’ shrank. We knew it was coming,” pointing to Labour’s policies as a key driver. This disconnect suggests that economists and media have underestimated the immediate impact of recent policy changes and global trade disruptions, focusing instead on earlier positive quarterly data that masked underlying weaknesses.
The failure to anticipate this downturn is particularly striking given the clear signals of economic strain. Businesses have been vocal about the pressures from higher taxes and global uncertainties, yet these were seemingly overlooked in mainstream forecasts. This raises concerns about the reliability of economic modelling and the media’s tendency to over-rely on optimistic projections, potentially ignoring on-the-ground realities.
Reasons for the GDP Fall
The May contraction was driven by several factors, with the ONS pinpointing sharp declines in manufacturing and construction as primary culprits. Here’s a breakdown of the key reasons:
1. Rachel Reeves’ Autumn Budget and Tax Rises: -
The Labour government’s £40bn tax-raising budget in October 2024, particularly the £25bn increase in employer National Insurance contributions (NICs) effective from April 2025, has significantly impacted businesses. Companies have responded by cutting jobs and scaling back investment, with HMRC data showing a loss of 109,000 jobs in May—the largest monthly drop since the 2020 COVID lockdown. Shadow Chancellor Mel Stride labelled this “economic vandalism,” arguing that the budget has dented business confidence and stifled growth. - The budget’s impact was compounded by other measures, such as changes to stamp duty thresholds, which led to a slump in real estate and legal activity in April and May. This contributed to a 0.4% contraction in the services sector in April, with lingering effects into May.
2. Global Trade Uncertainty and Trump’s Tariffs: -
The global economic environment has been rocked by US President Donald Trump’s tariff announcements, which began impacting UK exports in early 2025. The ONS reported a £2bn drop in exports in April, the largest monthly decrease since 1997, as companies faced uncertainty and higher costs. While a US-UK trade deal has mitigated some of the steepest tariffs, the broader “tariff war” has dampened business investment and consumer spending. Reeves herself acknowledged that “uncertainty about tariffs” contributed significantly to the April and May contractions.
3. Sector-Specific Weaknesses: -
Manufacturing output fell by 0.9% in May, driven by declines in oil and gas extraction, car manufacturing, and the volatile pharmaceutical industry. Construction also contracted by 0.6%, reflecting poor weather and reduced investment. Although the services sector grew by 0.1%, driven by legal firms recovering from stamp duty changes, it was not enough to offset the broader declines. - Retail sales were “very weak,” further signalling subdued consumer demand amid rising inflation and economic uncertainty.
4. Fragile Business and Consumer Confidence: -
Business surveys, such as the Confederation of British Industry’s growth indicator, have shown firms expecting to cut hiring and raise prices in early 2025 due to increased costs from NICs and a 6.7% rise in the national living wage. Consumer confidence has also waned, with households dipping into savings and real GDP per head falling by 0.2% in Q3 2024. This fragile sentiment has amplified the economic slowdown.
Overstated Quarterly Figures: The ONS Adjustment Issue
While the monthly GDP figures for April and May 2025 paint a grim picture, the quarterly figures tell a different story—one that may be misleadingly optimistic. The ONS reported that the economy grew by 0.5% in the three months from March to May 2025 compared to the previous three months, following a strong 0.7% growth in Q1 2025. However, this quarterly growth is overstated due to significant ONS adjustments and seasonal factors.
- Frontloading in Q1 2025:
The robust Q1 growth was driven by temporary factors, such as manufacturers rushing exports to beat US tariff deadlines and homebuyers completing purchases before stamp duty tax breaks expired. These activities artificially boosted early-year figures, creating a “bumper” effect that has since unwound, contributing to the April and May contractions. Economists like Paul Dales from Capital Economics suggest that this frontloading has skewed quarterly data, making the economy appear healthier than its underlying trajectory.
- Seasonal Adjustment Issues:
The ONS has noted a pattern since 2022 where GDP tends to be stronger in the first quarter and weaker in the second half, raising questions about the accuracy of seasonal adjustments post-COVID. These adjustments may exaggerate quarterly growth, masking the true extent of the slowdown in monthly data. For instance, the 0.5% growth in the March-to-May period contrasts sharply with the monthly declines, suggesting that the quarterly figure is not fully reflective of current economic momentum.
- Volatility in Monthly Data:
Monthly GDP figures are notoriously volatile and subject to revisions, but the consistent downturns in April and May indicate a genuine weakening. The ONS’s reliance on broader quarterly metrics can obscure these short-term trends, leading to an overestimation of economic health. Economists like Sanjay Raja from Deutsche Bank have revised Q2 2025 growth expectations downward to 0.1% from 0.25%, aligning more closely with the monthly data.
Implications and Outlook
The unexpected GDP contraction in May, coupled with the overstated quarterly figures, poses significant challenges for Chancellor Rachel Reeves, who has made economic growth her “number one mission.” The data underscores the fragility of the UK economy, with analysts like Hailey Low from the National Institute of Economic and Social Research warning that growth remains “fragile” amid global and domestic uncertainties.
The Bank of England is now widely expected to cut interest rates from 4.25% in August, as the weak GDP figures outweigh concerns about inflation, which has risen above 3%. However, with forecasts for 2025 GDP growth downgraded to 0.5–1.2% by institutions like Capital Economics and Goldman Sachs, the outlook remains subdued. Reeves faces pressure to balance her fiscal plans, with speculation of further tax rises in the autumn budget adding to business and consumer unease.
Conclusion
The 0.1% GDP contraction in May 2025, following a 0.3% drop in April, has exposed the vulnerability of the UK economy and the shortcomings of economic forecasting. Far from being “unexpected,” the downturn reflects the tangible impacts of Reeves’ tax-heavy budget, global trade disruptions from US tariffs, and sector-specific weaknesses in manufacturing and construction. The quarterly growth figures, while positive, are inflated by earlier frontloading and questionable ONS adjustments, masking the economy’s underlying struggles. As Reeves prepares for the autumn budget, the government must address these challenges head-on to restore confidence and deliver on its growth promises. For now, the UK economy remains on shaky ground, with businesses and consumers bracing for a turbulent second half of 2025.
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