The UK economy contracted by 0.1% in May 2025, driven by declines in the production and construction sectors, although the services sector showed slight growth.
This marked the second monthly decline in a row, adding to questions about the strength of the UK’s early-year recovery.
Lindsay James, investment strategist at Quilter, said the figures confirm a “struggle” for momentum after a better-than-expected first quarter. “Following a poor reading in April, today’s data shows another fall in May, as businesses continue to get to grips with increased costs and consumers deal with the associated lack of confidence,” she noted.
Production output dropped by 0.9% during the month, while construction fell by 0.6%, reversing from the 0.8% growth reported in April. Services, which account for the majority of UK economic activity, increased by just 0.1%, following a 0.3% decline in the previous month. “The spotlight has been well and truly shone on the UK economy in the past week or so,” said James, citing the Office for Budget Responsibility’s recent fiscal risks report as a warning signal.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said the figures are another setback for the Treasury. “Bad news keeps coming for the Chancellor,” she commented. “Already tight with her fiscal headroom, further contraction in GDP means the economic pie is smaller to be taxed.”
Mui pointed to national insurance hikes, global uncertainty and the unwinding of earlier trade activity as contributors to the slowdown. “A lot of the weakness relates to the reversal of frontloading in trade ahead of tariff increases and housing transactions due to stamp duty changes,” she added. According to Mui, the weaker outlook increases the likelihood of a rate cut in August—and potentially further easing ahead.
Emma Moriarty, portfolio manager at CG Asset Management, said recent developments in the gilt market and persistent inflation risks have reinforced their cautious positioning. “Our multi-asset portfolios remain defensively positioned, with a strong focus on inflation protection,” she noted. The CG UK Index Linked Bond Fund is running shorter duration than the benchmark, which has helped reduce volatility and deliver outperformance. Across strategies, allocations currently include 28% in risk assets, 37% in index-linked bonds, and 35% in short-term instruments such as cash, T-bills and short-dated credit.
UK equities have held up well in recent weeks, with the FTSE 100 recently notching a record close. However, that resilience may now be tested, as broader macroeconomic headwinds reassert themselves. “Some shine looks set to come off the FTSE 100,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “The latest growth snapshot may act as a bit of a drag on confidence.”
Streeter also pointed to renewed global trade tensions as a source of volatility. “The US President has ratcheted up threats against Canada, promising duties of 35% on imports, while blanket tariffs of 15–20% are being planned for other nations,” she said. While these moves are widely seen as tactical, “there is plenty of weariness around the more fractured nature of trade relationships in the Trump era.”
Despite the geopolitical turbulence, Streeter said UK assets still offer some relative stability. “There remain hopes that despite the trade bluster, the tariffs won’t weigh on the global economy as much as feared,” she said. The FTSE’s defensive tilt may support its performance, particularly if investors begin rotating away from more volatile sectors in the US.
James warned that the government may struggle to shift the trajectory. “Spending cuts are near-impossible to enact,” she said. “Further tax rises are not going to make this job any easier or more achievable.” The government’s goal of delivering the highest sustained growth in the G7, she added, “now looks increasingly distant.”
Meanwhile, the energy sector is also feeling the weight of global pressures. Oil prices have edged higher amid ongoing geopolitical concerns, but British multinational oil and gas company BP has warned that softer pricing will hit its Q2 earnings. The energy major expects losses of up to $800 million in oil production and between $100 million and $300 million in its gas and low-carbon division. Still, falling net debt, stronger refining margins, and higher upstream production offer some reassurance.
“The company’s future profits remain intrinsically linked to oil and gas prices, over which it has no control,” Streeter said. “It shows the importance of BP not completely abandoning ambitions in the green energy space, whilst being selective in its approach.”
Mui concluded that, beyond the monthly GDP fluctuations, the broader economic outlook remains cautious and largely unconstructive.
