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The UK economy unexpectedly contracted 0.1 per cent in May, the second monthly decline in a row, in a sign that the strong growth seen earlier in the year has dissipated.
Fridayโs figure from the Office for National Statistics followed a contraction of 0.3 per cent in April and was well below the 0.1 per cent growth forecast by economists polled by Reuters.
Mayโs decline, driven by falls in production and construction, points to a sharp slowdown in the second quarter after the rapid growth of 0.7 per cent in the first three months of the year.
The pound fell 0.2 per cent against the dollar to $1.35 following the data release.
Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, said the figure was โa far cryโ from the first quarter, when a surge in exports and a robust performance in the services sector placed the UK among the G7โs top performers.
โGrowth over the first half of the year is now expected to be modest,โ said Nellis. โThis presents a challenge to the chancellor โ her fiscal headroom remains limited by high levels of public borrowing and debt and her spending plans are heavily reliant on kick-starting the economy.โ
The Labour governmentโs pledge to revive growth is central to funding chancellor Rachel Reevesโ spending plans, as she battles to fill a fiscal hole that economists say could be more than ยฃ20bn.
But the Bank of England has warned that underlying growth remains weak, adding that economic activity in the first quarter was boosted by one-off factors, such as frontloading activities ahead of US tariffs and changes to stamp duty.
Reeves said on Friday that the May GDP figure was โdisappointingโ, adding that she was โdetermined to kick-start economic growthโ.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: โThese downbeat figures undoubtedly increase anxiety over the health of the UK economy.โ
He added that an August rate cut from the BoE, which held borrowing costs at 4.25 per cent last month, โcurrently looks inevitableโ.
Following the data release, investors slightly increased their bets on a quarter-point August cut. The market expects two reductions by the end of the year.
ONS director of economic statistics Liz McKeown said Mayโs contraction had been driven by โnotable falls in production and construction, only partially offset by growth in servicesโ.
She added that the production decline centred on โoil and gas extraction, car manufacturing and the often-erratic pharmaceutical industryโ.
Paul Dales, economist at the consultancy Capital Economics, calculated that even if GDP improved to a flat reading in June, growth would still have slowed to just 0.1 per cent overall in the second quarter.
โThe hangover from the burst of activity in Q1 continued in May,โ he said, adding that he expects โfairly subduedโ growth this year โdue to the lingering drags from a weakening global economy and the rises in domestic taxes for UK businessesโ.
Growth was revised to 0.4 per cent in March, up from 0.2 per cent of initial estimates, boosting the expansion in the three months to May to 0.5 per cent, compared with the previous three months.
But McKeown said this reflected โstrength earlier in the year that resulted, in part, from some activity being brought forward to February and Marchโ.
The gloomy growth figures will cast a pall over a cabinet โaway dayโ convened by Prime Minister Sir Keir Starmer on Friday, at which ministers will try to map a path through a worsening fiscal outlook towards the autumn Budget.
Shadow chancellor Sir Mel Stride said: โThanks to Labourโs reckless choices the economy actually shrank in May. This will pile even further pressure for tax rises in the autumn. Labourโs costly U-turns, on winter fuel and welfare, have created a ticking tax time bomb.โ
Ministers at the away day will assess the damage caused to the public finances by the retreats over welfare reform and winter fuel payments, which have blown a hole of more than ยฃ6bn in the governmentโs fiscal plans.
Business leaders are warning Reeves against further weakening growth by trying to close that gap by hitting business and the City of London with higher taxes.
Ben Jones, CBI lead economist, said: โWith growing fiscal challenges and the autumn Budget on the horizon, the chancellor must provide clear reassurance โ no new taxes on business and instead offer a commitment to work alongside firms to dismantle barriers to growth.โ
