Surprise GDP drop 'rings alarm bells' for UK economy as hopes for H2 growth 'in Jeopardy

According to ONS data this morning, monthly real gross domestic product (GDP) is estimated to have fallen by 0.1% in May 2025, following an unrevised fall of 0.3% in April 2025 and growth of 0.4% in March 2025 (revised up from 0.2% in our previous publication).

Of the three main sectors in May 2025, production output was the largest contributor to the monthly GDP fall, decreasing by 0.9%. Construction output also decreased, by 0.6%. These figures were partially offset by an increase of 0.1% in services output in May 2025.

Today’s trade data mirrored the trend, as the trade in goods deficit widened by £6.1 billion to £61.0 billion in the three months to May 2025, while the trade in services surplus is estimated to have narrowed by £0.6 billion to £47.8 billion.

Exports of goods to the United States, including precious metals, rose by £0.3 billion in May 2025 following a substantial decrease the previous month, but remained relatively low. Imports of goods from the United States, including precious metals, decreased by £0.9 billion in May 2025 because of falls in imports of unspecified goods, fuels, and machinery and transport equipment.

GDP unexpectedly shrank by 0.1% in May, compounding April’s 0.3% decline as weakness across key sectors dragged down overall growth.

The news will be ringing alarm bells for the government, as higher tax rates and salary costs start to bite British businesses and global volatility brought about by US tariffs and conflicts stoke uncertainty.  

With the OBR warning the government on the UK’s “vulnerable” public finances and pointing to tax hikes or spending cuts in excess of £20 billion later in the year, and rumours of a freeze to income tax thresholds, any hopes of solid economic growth in the second half of the year now appear to be in real jeopardy.

Good exports to the US recovered slightly in May but remained well below previous high while US good imports dropped in a sign that the UK-US trade market could remain relatively closed off - despite the deal - as exporters deal with supply chain and cost challenges, and demand for UK goods wane amid tariff costs.

In this environment, businesses must stay nimble – limiting exposure to FX volatility by reviewing hedging strategies and ensuring ready access to flexible finance can help to boost resilience in what is a volatile and fast-changing economic landscape.