Tariff and tax duo compound UK economy slide

The UK economy has hit troubled waters again after shrinking in two consecutive months amid the impact of US tariffs and a wave of tax rises. 

The UK’s Office for National Statistics (ONS) said that gross domestic product (GDP) decreased by 0.1% in May after contracting by 0.3% in April. This two-month decline forms a dark picture of the health of the country’s economy.

The new data are at odds with previous predictions. Economists surveyed by Bloomberg forecast a 0.1% increase in GDP for May. Instead, the ongoing contraction of the economy has intensified fears that Britain is on course for stagnation — or even a technical recession — just months after it recorded growth in the first quarter.

The brunt of the UK’s economic slowdown fell on the construction and manufacturing sectors, which both saw their sharpest drop in almost a year.

Analysts say the knock-on effect of US tariffs introduced in April under the Trump administration’s “Liberation Day” policy permanently damaged UK output. Most manufacturers had scrambled to fill orders before the deadline, artificially inflating the first quarter’s numbers. Demand has virtually disappeared, with factories sitting idle and projects postponed.

Consumers pull back spending as exports slide

UK foreign trade is now under maximum pressure. The export of goods to America remains below normal. These figures follow modest growth of £0.3 billion in May, which was insufficient to reverse the £2 billion nosedive seen in April.

Trade ministers in the UK Labour government have sought to mend the situation with the United States, but initial discussions have not provided a fix. 

Domestic spending is dropping too. Retail sales slumped in May as households tightened their belts in reaction to inflation-busting rises in everything from a loaf of bread to broadband. Regulated price rises – such as rail fares, water bills, and council taxes – have drawn painfully on consumers’ pockets.

Households remain cautious because of higher mortgage costs, while stamp duty on property purchases has increased. Property data firm Rightmove reported that the number of completed transactions fell 11% in May, when buyers were finding it difficult to front higher upfront costs.

The UK’s largest economic engine, the services sector, which accounts for about 80% of its economy, expanded by only 0.1% in May, indicating that even the toughest part of the UK economy is weakening. The governor of the Bank of England, Andrew Bailey, has conceded that a lack of clarity on taxes, trade, and interest rates is causing businesses to bide their time on important investment decisions.

Employers slash jobs amid economic pressure

Job losses are now accelerating as businesses come under increasing financial strain. More than 250,000 jobs have been lost since October 2024 when the budget introduced a £26 billion payroll tax raid on employers, according to figures compiled by the Institute for Employment Studies. Among the hardest hit are retail, hospitality, construction, and small manufacturing industries.

A high minimum wage is a complex issue, and a big reason is that it fires up a lot of opposition elsewhere, incl­uding from small businesses and many medium-sized ones. As they cannot pass those costs along to customers or absorb them in-house, many companies have opted to lay off workers or stop hiring altogether.

That stability, however, appears distant. After the GDP data was released, the pound lost 0.3% versus the dollar to $1.3545, its weakest in two weeks.

With the decline in inflation, financial markets are now pricing in cuts in interest rates by the Bank of England. Most forecast the first cut coming in August and another in December. Additional declines are being priced in for early 2026.

However, some economists caution that a rate cut alone will not resolve the deeper economic issues. 

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