UK Chancellor Rachel Reeves said she was ‘disappointed’ as the Office for National Statistics (ONS) reported that the UK economy contracted unexpectedly by 0.1% in May after falling by 0.3% in April. This second straight monthly fall came as a shock to analysts who had expected limited growth and puts additional pressure on Reeves who has made increasing economic growth a top priority.
Why Did the Economy Shrink Unexpectedly?
The ONS stressed that the downturn was principally driven by a large decline in manufacturing as well as a significant slowdown in retail sales which were described as being “very weak”. In addition, the construction sector also contracted which did not offset those losses. The underperformance erased gains at the beginning of the year which had undermined the growth expectations.
What Does Reeves Plan to Do Next?
Reeves called the figures “disappointing” and reiterated her desire to revive growth through public service investment and higher wages. The Bank of England is also being pressured to lower interest rates in August to help the economy.
Economists are warning the UK may approach recession in the second quarter without a recovery. Reeves must balance the need to stimulate growth without putting pressure on the public finances and with impending tax increases in the next budget.
Despite the blow to expectations, Reeves pointed to a resilient services sector and strong exports earlier in the year. But the surprise contraction in May indicates that decisive policy action is needed. Monetary stimulus will certainly be necessary,
