The UK economy shrank for the second straight month in May, with signs that a fragile recovery could be stagnant amid the early setbacks of new prime minister Rachel Reeves.
GDP signed up 0.1% in May, no more than analysts’ expectations for a modest rebound, according to data released by the National Bureau of Statistics (ONS) this morning. This was a magnitude drop of 0.3% in April, marking a brief rebound in March and a decline in the second month.
ONS said the decline in May was mainly due to a 0.9% decline in industrial production and a 0.6% decline in construction output, despite a slight growth rate of 0.1% for the main service sector.
ONS points out:
- Service output rose 0.1% in May after a 0.3% decline in April.
- After a 0.6% drop in April, production output – covering manufacturing and energy – fell by 0.9%.
- Construction output fell 0.6% in May, inverting April earnings.
Although the three sectors showed growth in the three months to May – growing at 1.2% construction, a month-on-month picture is even more important to the image of the economy working hard to build momentum.
The data came a week after Rachel Reeves promised to achieve “stability and growth” through her new fiscal rules and pro-business agenda. But as economic activity falters, the Prime Minister faces increasing pressure to develop clear strategies to boost investment and avoid further slowdowns.
Ben Jones, chief economist at the United Kingdom Industry Federation (CBI), said today’s data highlights the risks that still face in UK businesses. “The growth in May highlights the ongoing pressure on the economy, with the ongoing struggles in manufacturing and retail. The ongoing trade uncertainty has lowered the growth of the labour market and lowered income growth, which is a stable income, which is a solid recovery rate.”
“With the fall budget approaching, the Prime Minister must assure the company that there will be no new taxes for business but focus on removing barriers to growth.”
Jones added that “a partnership between business and government” is crucial to maintaining any meaningful recovery.
The contraction of plums also reflects a wider global headwind. The IMF lowered its forecast for global growth with geopolitical risks and weaker trade flows, while central banks remain cautious in reducing interest rates.
The UK inflation rate is now back to the Bank of England’s 2% target, but borrowing costs are still rising and weighing household demand and business investment. Without targeted support, the economy may struggle to generate the motivation needed to improve living standards and unleash the energy needed to improve productivity, analysts warn.
The risk of stagnation throughout the summer remains high, especially if global demand weakens further or consumer confidence slips. However, it was pointed out that if inflation continues to ease and lower interest rates are achieved later this year, the long-term outlook could improve.
For now, though, the warning sign is clear: while services may be ticking, the UK’s industrial and construction bases are still in a state of tension. As new governments are under increasing pressure on their growth agenda, today’s data may prove an important early test of their economic credibility.
