London,ย The UK economy unexpectedly shrank by 0.1% in May 2025, marking a second consecutive month of contraction and raising fresh concerns over the nationโs growth prospects, the Office for National Statistics (ONS) has reported. This downturn comes despite prior expectations of modest growth and challenges the governmentโs ambitions to stimulate economic expansion.
Manufacturing Weakness Drives Economic Slump
The latest figures from the ONS indicate that the overall economic contraction in May was predominantly driven by a decline in the manufacturing sector. Key industries such as oil and gas extraction, automotive production, and pharmaceuticals experienced significant downturns. Retail sales also remained subdued, contributing further to the negative output.
โManufacturing output fell noticeably last month, with car production and the pharmaceutical sectorย known for its volatilityย dragging growth down,โ said an ONS spokesperson. Oil and gas extraction also declined, reflecting ongoing global energy market uncertainties.
Conversely, the services sector showed resilience, managing overall growth in May. Legal services rebounded following a dip linked to changes in stamp duty thresholds the previous month, providing some support to the broader economy.
Economic Fragility and Policy Challenges
Economists warn that the consecutive monthly contractions underscore a fragile economic recovery path. Hailey Low, associate economist at the National Institute of Economic and Social Research (NIESR), cautioned: โThe back-to-back declines in April and May suggest that the UK economy remains vulnerable to shocks and external pressures.โ
Low highlighted recent government policy reversals, noting that a U-turn on welfare cuts has reduced fiscal flexibility, leaving less room for maneuvering amid economic uncertainty. โWith both wage and tax increases causing businesses to pull back on hiring, and public finances under strain, the prospects for sustained growth appear muted over the medium term,โ she added.
The government faces difficult decisions ahead of the autumn budget, according to Low. โChancellor Rachel Reeves will need to balance raising taxes or cutting spending to meet fiscal targets, which could weigh further on economic performance,โ she said.
Export-Driven Businesses Weather Storm
While the domestic economy shows signs of weakness, some export-focused firms report continued expansion despite challenging conditions. Mick Crosthwaite, chief executive of Hallmarq, a veterinary imaging firm, told the BBC: โWeโre operating in a tough environment marked by high inflation and interest rates, along with geopolitical tensions and rising tariffs. However, as an innovative company exporting to 26 countries, weโre still managing to grow.โ
Crosthwaite emphasized that the firmโs diverse international footprint insulates it somewhat from UK-specific economic fluctuations. โOur ability to maintain growth highlights the importance of global markets for British businesses in todayโs unstable landscape,โ he said.
Government Response and Growth Outlook
Following the release of the data, Chancellor Rachel Reeves acknowledged the disappointing performance but reiterated her commitment to reviving growth. โWhile todayโs figures are disappointing, I remain determined to kickstart economic growth and create the conditions for a stronger, more resilient economy,โ she stated.
The early months of 2025 had painted a somewhat more optimistic picture, with the economy expanding by 0.7% between January and March. This growth was buoyed by increased exports, spurred by manufacturers accelerating orders to avoid looming higher US import tariffs, and a surge in property transactions before the expiry of a temporary stamp duty concession.
Despite the contraction in May, the economy grew by 0.5% in the March-to-May period compared to the preceding quarter, illustrating short-term fluctuations rather than a broad-based downturn.
Historical Context and Structural Challenges
The current performance must be understood against the backdrop of enduring economic challenges since the COVID-19 pandemic and the UKโs exit from the European Union. Post-Brexit trade frictions, labor shortages, and supply chain disruptions have periodically hampered industrial productivity and business confidence.
Additionally, persistent inflationary pressures largely driven by energy costs and global commodity prices have eroded household spending power and increased operational expenses across sectors. The Bank of England has responded with a series of interest rate hikes to tame inflation, which in turn have increased borrowing costs for consumers and businesses alike, potentially damping investment and consumption.
Data from the ONS illustrates a volatile economic trajectory since mid-2023, with repeated dips counterbalanced by brief recovery periods. Analysts remain concerned about the economyโs ability to sustain momentum amid external uncertainties, including geopolitical tensions, fluctuating commodity markets, and evolving global trade policies.
Implications for Labour Market and Public Finances
The uncertain growth outlook has implications for the UK labour market and public finances. Hiring intentions have cooled, with businesses reluctant to expand payrolls amid rising wage costs and fiscal tightening. According to NIESRโs Hailey Low, โThe combination of tax increases and constrained public spending is likely to keep growth subdued, affecting job creation and wage growth.โ
Public sector Borrowing continues to be a concern for policymakers focused on fiscal consolidation. Dr. Andrew Smith, senior economist at the Institute for Fiscal Studies, noted: โBalancing fiscal responsibility and the need to support economic growth is a perennial challenge. The governmentโs decisions around welfare, taxation, and investment will be critical in shaping the economic landscape in the next few years.โ
Looking Ahead: Risks and Opportunities
With inflation expected to gradually ease and consumer confidence tentatively recovering, economists anticipate a modest economic revival later in 2025, although sustained growth remains uncertain. Continued geopolitical developments, potential global trade disruptions, and domestic policy decisions will also play significant roles.
Expert observers urge policymakers to focus on structural reforms, investment in innovation, and support for export-oriented industries to enhance resilience. โDiversifying the economy and boosting productivity will be essential to overcoming the cyclical shocks experienced recently,โ said Dr. Emily Carter, an economic policy analyst at the London School of Economics.
Reevesโs upcoming autumn budget will be closely watched for measures aimed at stimulating growth while maintaining fiscal prudence. The ability to navigate these competing demands will significantly influence the UKโs economic trajectory in the years ahead.
Summary: The UK economy contracted by 0.1% in May 2025, extending a two-month period of decline largely due to manufacturing weaknesses and sluggish retail sales. While services and export-driven businesses show resilience, concerns persist over a fragile growth outlook amid inflationary pressures, fiscal constraints, and geopolitical uncertainties. Chancellor Rachel Reeves faces challenging policy decisions to foster sustainable economic expansion in a complex environment.
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