UK Economy Shrunk 0.3% in April as Tariffs and Taxes Bite
Sharp tax increases and US President Donald Trump’s tariffs triggered the UK’s biggest monthly contraction in 18 months, casting doubt over the Labour government’s plan to fund its spending ambitions with faster growth.
Gross domestic product dropped 0.3% in April after healthy expansion in the previous two months, the Office for National Statistics said Thursday. Economists surveyed by Bloomberg had predicted a 0.1% decline. Services and manufacturing shrank, while construction grew.
The figures are a reality check for Prime Minister Keir Starmer who has repeatedly hailed Britain outperforming the other Group-of-Seven nations in the first quarter as evidence of the economy turning a corner.
It sets the stage for a tepid second quarter as firms and consumers navigate mounting job losses, tax rises and Trump’s global trade war. April saw the largest monthly drop in US goods exports since records began in January 1997 after a rush to get ahead of the tariffs in the first quarter.
“Weaker growth is a headache for the chancellor as it makes generating the revenue government needs to support its sizable spending plans more difficult, increasing the chances of further tax rises in the autumn Budget,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
Chancellor of the Exchequer Rachel Reeves said Thursday’s GDP figures were “clearly disappointing,” in an emailed statement.
Speaking to the BBC later on Thursday morning, however, Reeves said the monthly numbers are “notoriously volatile” and argued the UK’s trade deals with India, the US and the European Union will boost growth, alongside Labour’s plans to liberalize Britain’s planning system.
Interest Rates
April’s figure was the first monthly contraction in six months and the largest since Labour won a landslide election victory last summer. Economists expect growth of just 0.1% in the current quarter.
Signs of a weaker economy prompted traders to add to bets on further interest-rate cuts from the Bank of England this year, fully pricing two more quarter-point reductions. The pound pared gains.
Starmer’s Labour government is relying on momentum from the growth at the start of 2025 to fund efforts to revive public services outlined by Chancellor Reeves on Wednesday. Reeves unveiled plans to ramp up investment in transport, defense and energy while pumping money into the ailing National Health Service.
The data show it may be too soon for Labour to declare that the economy has turned a corner with Starmer saying that Wednesday’s Spending Review marked a new phase for his embattled government. He said the recent first quarter growth pick-up had allowed him to U-turn on winter fuel payments for pensioners.
However, it could prove a risky strategy, with the Bank of England and forecasters surveyed by Bloomberg expecting the economy to slow sharply from the 0.7% expansion in the first quarter.
Growth is expected to average just 0.3% a quarter until the end of 2026, raising the prospect that Reeves has to raise taxes again to keep the budget deficit in check. Data on Tuesday also showed the economy has lost over a quarter of a million jobs since Reeves ramped up payroll taxes and the minimum wage in her first budget.
The weakness in April likely reflects a payback effect from temporary factors that boosted the first quarter, including the threat of US tariffs forcing manufacturers to rush out exports. Goods exports to the US fell by £2 billion in April, which the ONS said was “likely linked to the implementation of tariffs on goods imported to the United States.” Consumers also pulled backed after splashing out in the first quarter with retail sales weighing on output.
In what parts of the British media dubbed “awful April,” the month also saw consumers hit by higher bills for energy and other regulated services, firms saddled with increases to payroll taxes and the minimum wage, and Trump launch the opening salvo in his global trade war. Businesses across sectors blamed Labour’s tax increases and US tariffs for lower demand, the ONS said.
The ONS said output in the services sector, the largest part of the UK economy, contracted 0.4%. Lawyers and real estate agents experienced a sharp fall in activity in April, reflecting a plunge in home sales as buyers bought forward transactions ahead of an increase in taxes in for buyers. Manufacturing also suffered a 0.9% drop in production.
“April’s GDP contraction looks to be heavily distorted by the unwinding of tariff and tax related distortions,” said Thomas Pugh, chief economist at RSM UK. “Forecasts of recession now seem too pessimistic.”
Source : Bloomberg
