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Key Takeaways
- U.K. GDP shrank 0.1% in May, missing analyst expectations and marking a second straight monthly decline.
- Production and construction sectors led the downturn, falling 0.9% and 0.6% respectively.
- Market odds now favor an August rate cut from the Bank of England as economic momentum weakens.
The U.K. economy shrank by 0.1% in May, defying analyst expectations of modest growth, according to new data from the Office for National Statistics (ONS). The contraction, driven largely by sharp declines in production and construction, adds renewed pressure on Finance Minister Rachel Reeves, who has prioritized economic revitalization and deficit reduction.
Production and Construction Sectors Lead Downturn
Production output dropped 0.9% month-on-month, while construction activity declined by 0.6%. These sectors had already shown signs of strain in April, when GDP fell 0.3% amid newly implemented domestic tax hikes and rising global trade tensions.
May’s figures suggest the U.K. economy is struggling to maintain momentum after a robust 0.7% expansion in Q1, which many economists attribute to frontloaded activity ahead of U.S. trade tariffs introduced by President Trump. Despite the U.K. securing a trade deal with the U.S., the lingering effects of global uncertainty continue to weigh on domestic output.
Rate Cut Expectations Grow Ahead of August BOE Meeting
The disappointing growth numbers have intensified speculation around a potential Bank of England (BOE) rate cut in August. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, described a rate cut as “inevitable,” despite inflation remaining above 3%.
The BOE has gradually lowered its key interest rate from 5.25% to 4.25% over the past year—less aggressively than the European Central Bank. Current money market pricing suggests an 80% likelihood of an August rate cut.
Economists Revise Growth Outlook for Q2
Sanjay Raja, chief U.K. economist at Deutsche Bank, revised his Q2 growth forecast to 0.1%, down from 0.25%, citing the May GDP dip. However, he maintained that the economy isn’t “faltering,” pointing to resilient household sentiment and business conditions.
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With economic momentum weakening and critical sectors contracting, the U.K.’s path to sustained recovery remains uncertain. All eyes are now on the BOE’s August decision and incoming Q2 GDP data, due August 14.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
