Rachel Reeves disappointed after economy shrinks

The UK economy shrank unexpectedly in May, contracting for the second month in a row.

The economy contracted by 0.1%, the Office for National Statistics (ONS) said, confounding analysts who expected to see slight growth.

The government has made boosting economic growth a key priority and Chancellor Rachel Reeves said the latest figure was “disappointing”.

The fall in economic output was mainly driven by a drop in manufacturing, the ONS said, while retail sales were “very weak”.

Oil and gas extraction was down, while car-making and the “often erratic” pharmaceutical industry were weaker, the ONS said.

The services sector grew overall in May, with legal firms recovering from the impact of changes to stamp duty thresholds the previous month.

The contraction in the economy in both April and May shows the outlook for growth “remains fragile”, said Hailey Low, associate economist National Institute of Economic and Social Research.

Government U-turns on spending cuts such as on welfare have eroded the financial buffer it has to cope with economic shocks, she added.

With businesses scaling back hiring intentions after wage and tax rises, and “strained” public finances, prospects for growth “remain muted in the medium term” Ms Low said.

Reeves faces “hard trade-offs” in her Budget in the autumn, “having to raise taxes or cut spending to meet her self imposed rules”, she added.

The economy, is “tough” at the moment, with “high inflation and high interest rates”, says Mick Crosthwaite, chief executive of veterinary imaging firm Hallmarq.

However, he says the firm is “doing well” because it’s export driven.

“There’s no doubt that we’re in an unstable environment, geopolitically with tariffs, and taxes increasing in the UK, but as an innovative business that’s exporting throughout the world, we’re able to continue to grow,” he says.

He adds that the business exports to 26 countries around the world, so “we’re not tied just to the UK economy”.

Reacting to the latest GDP data, Reeves said “while today’s figures are disappointing, I am determined to kickstart economic growth”.

In the first three months of the year, the economy had grown by 0.7%. During this period it was boosted by exports as manufacturers raced to beat higher US import taxes, and as homebuyers rushed to complete purchases before the expiry of the stamp duty tax break.

This stronger activity earlier in the year meant that, despite May’s contraction, the economy grew by 0.5% in the March-to-May period compared with the previous three months.

Lindsay James, investment strategist at Quilter, said a “spotlight has been well and truly shone on the UK economy in the past week or so”.

She said spending cuts had been “nigh on impossible to enact” and that government forecaster the Office for Budget Responsibility (OBR) had released a “sobering” report on fiscal risks.

The OBR said on Tuesday that the UK’s public finances were in a “relatively vulnerable position”.

Reversing planned spending cuts, including on welfare and on the winter fuel allowance, plus backtracking on tax rises, have contributed to a continued rise in public debt, it said.