UK economy suffers worst monthly contraction since 2023

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The UK economy suffered its worst contraction since 2023 in April as President Donald Trump’s trade war hit exports to the US and tax increases held back the services sector, underlining the challenge facing chancellor Rachel Reeves in boosting growth.

The 0.3 per cent GDP decline was the steepest since October 2023 and below the 0.1 per cent contraction forecast by economists polled by Reuters. It followed growth of 0.2 per cent in March.

Output in the dominant services sector fell 0.4 per cent, with the end of a tax break on home purchases hurting estate agents and law firms. Goods exports to the US fell the most on record, suggesting activity had been brought forward ahead of the sweeping tariffs that took effect in April.

UK companies have also faced an increase in national insurance contributions since April, while households are grappling with higher utility bills.

The figures were released a day after Reeves set out the government’s spending review, which promised to put Britain on a path to “national renewal”. It delivered an annual boost for the NHS but real-term spending cuts for many Whitehall departments.

Economists said lacklustre growth raised the prospect that Reeves could be forced to raise taxes in the autumn Budget.

Asked about the possibility following the GDP figures release, Reeves refused to rule it out, telling the BBC that “no chancellor is able to write another four budgets in the first year of a government, you know how much uncertainty there is in the world at the moment”.

The contraction in April followed a 0.7 per cent expansion in the first three months of this year, but the Bank of England expects the pace of growth to slow to 0.1 per cent in the second quarter.

Rob Morgan, chief investment analyst at Charles Stanley, said first-quarter growth had been helped by “a dash for exports” ahead of the imposition of tariffs.

But he added: “With that spike in activity in the rear-view mirror, it’s back to a more mundane reality. UK growth [will be] well below where the government wants it to be.”

The BoE’s Monetary Policy Committee has cut interest rates four times since last summer, but was split three ways over last month’s quarter-point reduction to 4.25 per cent.   

This week traders increased their bets that the central bank would deliver two more quarter-point cuts this year, with the next move coming in September, after official data showed the unemployment rate rose to a four-year high in the three months to April.

Following the release of the GDP data, the pound dipped but remained up 0.2 per cent on the day at $1.357 against a broadly weaker dollar. The yield on the two-year gilt, which is sensitive to interest rate expectations, fell 0.03 percentage points to 3.89 per cent.

With additional reporting by Ian Smith and Jim Pickard in London