UK Economy Shrinks Again Amid Manufacturing and Retail Slump

 

The UK economy unexpectedly shrank in May 2025, marking the second month in a row of contraction, according to the Office for National Statistics (ONS). GDP fell by 0.1%, surprising analysts who had forecast slight growth. The decline was mainly driven by weakness in manufacturing and retail. Oil and gas extraction also dropped, along with car production and a dip in pharmaceutical output, which is often volatile.

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While the services sector showed some growth particularly legal services recovering after recent changes to stamp duty overall performance failed to offset the broader economic slowdown. Chancellor Rachel Reeves described the figure as “disappointing,” stressing the importance of revitalizing growth.

Economist Hailey Low from the National Institute of Economic and Social Research warned the outlook remains fragile. She noted that past reversals on spending cuts have reduced the government's ability to handle economic shocks. With higher wages, increased taxes, and weak public finances, businesses have also started reducing hiring plans.

Reeves is expected to face tough decisions in the upcoming autumn budget. To meet her fiscal rules, she may need to either raise taxes or cut spending both unpopular moves amid public dissatisfaction and a sluggish economy.

Despite overall economic weakness, some UK-based companies are performing well, especially those with strong export bases. Mick Crosthwaite, CEO of veterinary imaging firm Hallmarq, said his company is “doing well” even as the UK economy remains "tough" due to high inflation, high interest rates, and increasing taxes. The company exports to 26 countries, reducing its dependence on domestic conditions.

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Recent GDP data shows fluctuations in monthly performance, with short bursts of growth offset by contractions. A stronger first quarter, boosted by pre-emptive exports and housing activity before tax changes, meant the March-to-May period still saw a modest 0.5% growth overall.

However, government forecasts and spending trends are sounding alarms. The Office for Budget Responsibility (OBR) recently reported the UK’s public finances are in a “relatively vulnerable position.” Reversals on welfare and fuel allowance cuts, alongside tax policy shifts, have worsened public debt. Investment strategist Lindsay James said fiscal policy has faced delays and reversals, making spending cuts difficult and future economic stability uncertain.

Despite some resilience, the broader outlook suggests the UK’s recovery remains uneven and vulnerable to further shocks.

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