The UK economy contracted 0.1% m/m in May, marking the second consecutive monthly drop after a 0.3% fall in April. This surprised to the downside of our forecast for a 0.1% gain. The contraction reflects further unwinding of tariff and tax front-running and weakness in consumer-facing services. May’s GDP data increases the likelihood that the Monetary Policy Committee (MPC) will cut interest rates in August. Looking ahead, we expect the economy to return to growth in June following a rebound in business survey sentiment and as uncertainty fades further.

Tariff front-running had further to fall, weakness in consumer-facing services too

The production side of the economy was the biggest drag on growth in May. Manufacturing output fell by 1%.

The downturn was driven by weakness in pharmaceuticals and transport manufacturing. In the case of the latter, this is most likely the result of US tariffs, which brought activity forward into Q1 to beat the levies introduced in April. Indeed, March’s manufacturing output was revised up a whopping 0.7ppts. This means the unwinding of tariff front-running had further to go than we had anticipated.

Construction output compounded this weakness. It fell by 0.6% in May after three consecutive months of strong growth. This entirely reflected a drop-off in repair and maintenance work. Meanwhile, infrastructure projects grew by 3% m/m and for the sixth consecutive month. This is due in part to some of the 4.7% nominal increase in the government’s investment spending starting to work its way through the economy.

The services side of the economy was also able to grow slightly by 0.1% in May thanks to the huge 2% gain in IT services. Professional services also recovered by 0.8% as activity returned to trend following changes to Stamp Duty Land Tax and April’s slump.

However, it wasn’t all positive. Consumer-facing services collapsed 1.2% in May due to a 2.7% drop in retail trade. This once again highlights just how cautious consumers have been recently. Additionally, motor trades fell 1.3% as front running from Vehicle Excise Duty increases continued to unwind. Yet consumers didn’t entirely put the brakes on spending in May. Accommodation and food services are now growing at the fastest pace since May 2022 (+1.8% 3m/3m).

Surveys point to an economic recovery in June

Looking ahead, our call for 0.2% growth in June looks increasingly optimistic. However, upward revisions to growth in previous months mean that even stagnation in June would deliver 0.1% growth in Q2 and it wouldn’t take much to boost growth to 0.2%.

What’s more, early signs are that the economy will rebound in June. The S&P Global Composite Output Purchasing Managers’ Index (PMI) rebounded to its strongest level since September 2024. This suggests any residual worries about tax rises and tariffs have largely faded. Consumer confidence also reached its highest level since December, which should help retail sales return to growth. All of this points to a much better outlook for June than a straight read of April and May’s GDP data would suggest.

Beyond the second quarter, the big risk is the ongoing speculation around further tax rises in the autumn. This could keep households on edge and prompt consumers to keep saving in anticipation of the Autumn Budget. Fortunately, households have rebuilt their savings and will be tempted to spend more as interest rates cuts reduce returns.

Ultimately, we think the economy will grow in June as disruption from tariffs and tax rises continues to recede. The boost to government spending and a gradual rise in household consumption should help to keep the economy growing. What’s more, May’s weak growth reading boosts the odds of the MPC cutting interest rates in August.