THE UK economy shrank by more than expected in April, official figures show.
The Office for National Statistics (ONS) said Gross Domestic Product (GDP) went down by 0.3%.
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Services and manufacturing both contributed to the fall.
However, GDP still grew over the last three months as a whole, with signs that some activity may have been brought forward from April to earlier in the year.
The figures likely reflect the impact of huge tariffs imposed by US President Donald Trump.
Experts had warned the tariffs could put a dampener on UK sectors including car and steel manufacturers.
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They said growth in the latter part of this year is likely to be much weaker than in the first quarter due to Trump’s erratic tariff plans.
The economy has also been weakened by rising household bills hitting the public’s pockets and by businesses being forced to pay more in National Insurance contributions.
It comes after the economy grew by 0.7% in the quarter to March.
At the time, it had grown more than expected.
Liz McKeown, director of economic statistics at the ONS, said: “Both legal and real estate firms fared badly in April, following a sharp increase in house sales in March when buyers rushed to complete purchases ahead of changes to stamp duty.
“Car manufacturing also performed poorly after growing in the first quarter of the year.
Highlights – Rachel Reeves unveils £113 BILLION boost to fix Britain in spending review
“In contrast April was a strong month for construction, research and development and retail, with increases in these only partially offsetting falls elsewhere.”
Chancellor Rachel Reeves has acknowledged the latest figures were “clearly disappointing” but said yesterday’s spending review would help deliver growth.
GDP is one of the main indicators used to measure how well an economy is performing.
When it goes up, it means the economy is doing well. When it falls, it means the economy has shrunk.
The figures published by the ONS today are estimates and could be revised up or down in the future.
Commenting on the figures, the Chancellor said: “Our number one mission is delivering growth to put more money in people’s pockets through our Plan for Change, and while these numbers are clearly disappointing, I’m determined to deliver on that mission.”
She said yesterday’s spending review would deliver jobs and growth through measures such as improving city transport, investment in affordable homes and funding the Sizewell C nuclear power station.
However, concerns have been raised about how the plans will be funded and whether they could lead to tax rises.
Shadow business secretary Andrew Griffith said: “It’s bad news that growth has fallen but when you introduce a £25billion jobs tax, hike business rates, drive investors overseas and spawn hundreds of pages of extra red tape, lower growth is precisely what you get.
“You can’t tax and spend your way to growth.”
The figures also come after the UK’s unemployment rate rose to the highest level in nearly four years.
It was estimated at 4.6% for February to April this year, slightly above last quarter’s rate of 4.5%.
Meanwhile, growth in average earnings slowed again after businesses were hit with a hike in National Insurance contributions for employees in April.
The chancellor is facing a tough choice this autumn
The Sun’s Economics Editor Ryan Sabey looks at what the latest GDP figures mean…
Rachel Reeves revelled in a major spending splurge yesterday – but this morning she wakes up to a grim reality check.
The Chancellor delighted in getting out the cheque book as billions of pounds were allocated to health and defence combined with shiny new infrastructure projects.
But today is a different story.
The Chancellor says that the figures are “clearly disappointing” but it’s a stark reminder of the fragility of the UK economy and how difficult it will be to turbo-charge growth.
The effects of ‘Awful April’ – when a slew of added costs for business including that National Insurance rise came in – has hit home.
This Labour government has put that push for growth as their number one mission which will have the knock-on effect of driving up living standards.
After a positive start to the year – where we saw growth up by 0.7% – today we see it drop by 0.3% for May.
We shouldn’t take one month’s figures in isolation but the fear is conditions for business and entrepreneurs have hit them hard.
The hike to National Insurance contributions and minimum wage for firms kicked in at the start of April and this is how the economy has reacted.
As the British Chambers of Commerce outline the NI rise has hit investment, recruitment and prices.
The uncertainty of Donald Trump’s tariffs is also a drag on the UK with the largest monthly fall on record in goods exports to the US.
With dismal economic growth, the global trade war and stubborn inflation, the Chancellor will surely be left with little choice but to cut spending or raise taxes in the autumn.
She has iron-clad fiscal rules she insists are non-negotiable so it feels inevitable something will have to give. A cruel summer of speculation is on the cards.
What it means for your money
GDP measures the economic output of companies, individuals and governments.
If it is rising steadily, but not too much, it’s a sign of a healthy economy.
This is because it usually means people are spending more, the Government earns more tax and workers get better pay rises.
It also usually means lower inflation as companies don’t have to hike their prices to cover shortfalls in their coffers.
The Bank of England (BoE) also uses GDP and inflation as key indicators when setting its base rate.
The base rate decides how much the BoE will charge banks to lend them money.
It is also a way that the BoE can help to control inflation.
Usually, when inflation is low, the BoE cuts interest rates to try to speed up the economy.
Rate-setters on the BoE’s Monetary Policy Committee last month cut the base rate from 4.5% to 4.25%.
This was the fourth interest rate cut since 2020.
What is the base rate and how does it affect the economy?
NINE members of the Bank of England’s Monetary Policy Committee meet eight times each year to set the base rate.
Any change to the Bank’s rate can have wide-reaching consequences as it directly influences both:
- The cost that lenders charge people to borrow money
- The amount of savings interest banks pay out to customers.
When the Bank of England lowers interest rates, consumers tend to increase spending.
This can directly affect the country’s GDP and help steer the economy into growth and out of a recession.
In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages.
But those with savings tend to lose out.
However, when more credit is available to consumers, demand can increase, and prices tend to rise.
And if the inflation rate rises substantially – the Bank of England might increase interest rates to bring prices back down.
When the cost of borrowing rises – consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices.
The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target.
In this scenario, the losers are those with debt.
First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately.
Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower – but their bills could drastically increase when it’s time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises.
However, the winners in this scenario are those with money to save.
Banks tend to battle it out by offering market-leading saving rates when the base rate is high.
Alice Haine, personal finance analyst at investment platform Bestinvest by Evelyn Partners, said the contracting economy will be “concerning” for people’s finances.
“Lacklustre economic growth can have dire consequences for people’s finances if earnings stagnate and redundancies ramp up as companies focus on reducing costs rather than investing in expansion and new hires,” she said.
“Pair a softening labour market and slowing pay growth with an uptick in inflation in April and a creeping tax burden and household finances may start to feel the squeeze once again.”
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However, she said there are some “glimmers of hope” as borrowing costs have eased from their peak due to the interest rate cuts.
Plus, energy costs are set to drop next month.
