UK economy contracts unexpectedly by 0.3% in April

The UK economy shrank by 0.3 per cent in April, a noticeably sharper downturn than economists had forecast. This follows a 0.2 per cent growth in March, with April’s contraction attributed to the impacts of new tariffs and increases in national insurance contributions faced by employers.

Data from the Office for National Statistics (ONS) revealed that the UK’s dominant services sector, which constitutes around three-quarters of the economy, saw a decline of 0.4 per cent. Additionally, output in the production sector, including manufacturing, dropped by 0.6 per cent. However, the construction industry managed to grow by 0.9 per cent, making it the best-performing sector during this period.

Economic activity slowed amid concerns over tariffs imposed by the United States on 2 April and the knock-on effects of a payroll tax increase earlier the same month. The ONS also highlighted that consumer activity was affected by regulatory changes. March witnessed a surge in house transactions and car sales ahead of changes to stamp duty and vehicle excise duty, causing these areas to slump in April.

Despite the disappointing April figures, the economy maintained a 0.7 per cent growth rate on a rolling three-month measure, in line with earlier predictions. However, the results are a setback for government ministers who had hailed economic improvements earlier this year. Forecasts for annual GDP growth are currently set between 1.0 and 1.2 per cent for 2025.

Chancellor Rachel Reeves acknowledged the figures as ‘clearly disappointing’ following her announcement of over £100 billion in investment spending spread across the next four years. This spending review outlined some of the tightest departmental budgets since 2000, excluding the austerity period from 2010 to 2015. Slower economic growth is likely to place additional strain on fiscal targets due to reduced future tax revenues and higher welfare costs.

Economists suggested GDP might contract further by 0.1 per cent in the second quarter of the year, as businesses grapple with inflationary pressures and rising taxes. Meanwhile, the Bank of England is expected to hold interest rates steady at 4.25 per cent in its upcoming meeting. Concerns remain over inflation, which recently climbed to 3.4 per cent, despite unemployment rising to 4.6 per cent in April.

While analysts anticipate further interest rate cuts later this year to stimulate the slowing economy, the central bank has opted to watch for more definitive signs of economic stress before considering additional interventions.