UK Economy Contracts as Rachel Reeves Faces Autumn Budget Pressure

The UK economy experienced an unexpected decline of 0.1% in May, casting a shadow over Chancellor Rachel Reeves’s preparations for the upcoming autumn budget. The disappointing data arrives at a crucial moment when Reeves and her team had begun to harbour hopes of recovering business confidence.

The May contraction, whilst marginal, follows a more significant 0.3% decline in April. Despite the Office for National Statistics (ONS) revising March’s growth upward to 0.4%, economic indicators suggest the second quarter may record negative growth without substantial improvement in June.

Industrial production emerged as the primary catalyst for May’s downturn, recording a sharp 0.9% decrease. Manufacturing output fell by 1%, with vehicle manufacturing experiencing a dramatic 3.7% decline following April’s 9.5% drop. The ONS attributes these figures to automotive manufacturer model changeovers and the impact of trade tariffs, which have since been adjusted under the US trade agreement.

The economic landscape is further complicated by the recent £5bn welfare cuts package U-turn, designed to prevent a Commons defeat. Shadow Chancellor Mel Stride characterised the situation as a “ticking tax timebomb,” reflecting growing concerns about potential tax increases in the autumn budget.

The Bank of England’s monetary policy committee now faces increased pressure to implement a rate cut in August. Committee members Alan Taylor and Swati Dhingra have expressed particular concern about economic weakness, with Taylor advocating for three additional cuts throughout 2025 in response to the “deteriorating outlook.”

The Institute of Directors’ chief economist, Anna Leach, summarised the situation succinctly: “Despite the welcome launch of a plethora of government strategies, and a spending review which stuck to the pre-set envelope, we’re back worrying about tax rises in the forthcoming budget,” while the underlying economic growth remains “tepid and beset with risk.”