UK GDP declined by 0.1% month-on-month in May following a 0.3% decrease in April, diverging from expectations of 0.1% growth. While services output experienced minimal growth of 0.1%, construction and production outputs fell by 0.6% and 0.9%, respectively. Factors affecting the economy include higher US tariffs impacting car manufacturing and changes to stamp duty affecting construction. Although some optimism exists regarding future recovery, rising living wages and national insurance contributions pose challenges to labor-intensive industries, contributing to an uncertain macro-economic outlook and anticipated tax increases.
Some strength in the IT and professional services sectors mean services growth as a whole scraped into positive territory for the month. However, that was not enough to offset contractions in manufacturing and construction sectors, meaning the UK economy shrank unexpectedly in May.
Higher US tariffs seem to be causing some of the UK's woes, especially in car manufacturing - which faced the full brunt of tariffs early on. Changes to stamp duty have also weighed on the construction sector.
An optimist might argue these are one off headwinds - US tariffs on UK cars have already been softened, and the housing market will get moving again once its had time to adjust.
Despite markets hitting record highs, the macro-economic picture is uncertain and taxes look set to rise substantially at the next budget.
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