Chancellor Rachel Reeves is said to be “disappointed” at the 0.1% contraction in the UK economy, but borrowers and buyers are looking forward to an interest rate cut in August.
The UK economy unexpectedly shrinking by 0.1% in May comes off the back of April’s 0.3% decline in GDP. It’s a step in the right direction, but still below what the government had been hoping for.
It also goes against what economists had predicted for May’s results, with declines in industrial output and construction pulling down the final figure. The situation hasn’t been helped by US President Donald Trump’s international trade war.
Commenting on the latest UK economy result, the finance minister Rachel Reeves said: “While today’s figures are disappointing, I am determined to kickstart economic growth.”
Economists believe there is now more pressure on Reeves to announce tax increases in her Autumn Budget in a bid to get the UK economy back on track.
UK economy peaks and troughs
The year started off on a much more positive footing for the UK economy, with a surge in growth in the first three months of 2025 setting the country ahead of other G7 economies.
When Trump began to impose hiked tariffs on US trade with numerous countries, including the UK, the initial impact was one of a frenzy of activity. With the US being Britain’s single-largest export destination, US importers raced to beat the tariffs.
However, this died down in April, with trade data showing that May’s export levels were back down to where they were around three years ago.
Another influencing factor that supported growth in the UK economy in the first quarter of this year was a spike in housing market activity. This was largely due to buyers rushing to finalise purchases before stamp duty thresholds were reversed to previous levels.
However, some of the increased appetite was also down to renewed market confidence along with growth in the number of properties for sale, broadening opportunities for buyers. Research has found there has been no significant slowdown in the housing market since the stamp duty change on 1 April.
Interest rate cut ‘almost certain’
Although thousands of borrowers and prospective property buyers had hoped for another interest rate cut at the Bank of England’s last Monetary Policy Committee (MPC) meeting in June, rates were cautiously held at 4.25%.
The borrowing environment has steadily improved, though, with lenders cutting rates and boosting product numbers over the past couple of weeks as competition in the sector swells.
The Bank’s “careful and gradual” approach now seems highly likely to be influenced by UK economy figures, with analysts weighing in with their view that interest rates are set to be cut in August.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Headline GDP disappointed, which will keep the market pricing a high probability of an MPC rate cut in August.”
Ellie Henderson, an economist at Investec, commented: “We expect GDP to continue to expand, although we do not imagine the pace of growth will be breaking any records anytime soon.”
Henderson further added: “Falling interest rates look set to support activity but a looser market is likely to constrain activity.”
Sanjay Raja, chief economist at Deutsche Bank’s, echoed the view, pointing out that an interest rate reduction at the MPC’s next meeting on 7th August is now “almost certain” with “more [interest rate cuts] to come” in the final quarter of the year.
