U.K. Economy Contracts Again Amid Persistent Economic Challenges

The U.K. economy contracted for the second consecutive quarter in May, reflecting a lack of a significant recovery from April’s sharp decline, and putting pressure on the Bank of England to consider further monetary easing.

Key Economic Data:

• GDP Contraction: Data released by the Office for National Statistics (ONS) revealed that the U.K.’s gross domestic product (GDP) fell by 0.1% in May, following a 0.3% decline in April, marking the largest drop since October 2023. This result came in weaker than the expected 0.1% growth, highlighting the persistent challenges in the economy.
• Industrial and Manufacturing Production: The industrial production sector declined by 0.9% month-on-month, while manufacturing production saw a sharper fall of 1.0%. These figures signal the ongoing struggles of the U.K.’s key sectors.
• Annual Growth: On an annual basis, the U.K. economy grew by 0.7% in May, slowing down from the 0.9% growth seen in the previous month.

Factors Weighing on the Economy:

• Contributing Factors to Decline: The contraction in April was mainly driven by reduced legal activities due to the increase in stamp duty, as well as higher energy bills, National Insurance hikes, and uncertainty surrounding tariffs. These factors have continued to affect economic momentum in May.
• Future Fiscal Concerns: The government faces additional fiscal challenges, with Chancellor Rachel Reeves expected to raise significant amounts of money through tax increases due to internal dissent in the Labour Party over welfare reforms. This has raised concerns about the government’s ability to adequately reduce spending.

Outlook for the Bank of England:

• Monetary Policy: The Bank of England kept interest rates steady at 4.25% last month. However, with the continued economic struggles, market participants are betting on at least two further quarter-point rate cuts, bringing the rate down to 3.75% by the end of the year.
• Housing Market Update: In contrast to the broader economic slowdown, data from the Royal Institution of Chartered Surveyors (RICS) showed signs of improvement in the housing market. New buyer inquiries turned positive for the first time since December, and agreed sales improved in June, suggesting some stabilization after the downturn caused by the April property transaction tax hike.

While the U.K. economy continues to face significant headwinds, including challenges in industrial production and political uncertainty, the resilience in the housing market and potential monetary policy actions from the Bank of England may provide some relief. However, further fiscal measures, particularly tax hikes, are expected to be implemented later in the year to address the ongoing budgetary shortfall.