UK GDP: economy contracts in April, but underlying momentum steady

The UK economy contracted 0.3% m/m in April after a strong first quarter. The fall reflects the unwinding of some tariff and tax related front-running, as well as the shock to business and consumer confidence after the first White House announcements. The real economy also took a big hit, but remains on target.

Going forward, we do expect growth to pick up from May onwards. The worst of the tariffs have been rolled back, which is easing uncertainty and supporting recovery in business and consumer confidence. While April’s contraction won’t be enough to prompt the Monetary Policy Committee (MPC) to cut interest rates next week, it does make an August cut almost certain.

Tariffs and tax rises stymy April’s performance

Multiple sectors dragged down April’s figures. Manufacturing contracted for a second straight month, dropping by 0.9% m/m. This included a 5.2% fall in transport equipment manufacturing, which is one of the UK’s biggest exports to the US. Overall, the contraction suggests the front-running of tariffs, which boosted output in Q1, unwound in April.

Turning to the services side, output fell 0.4%m/m. This was the first drop in services output since October 2024. Here, the big drags on growth were an uncharacteristic contraction in professional services, which slumped 2.4% m/m, including a 10.2% collapse in legal activities. This double-digit decline followed a strong couple of months earlier in the year where house buyers rushed to beat changes to stamp duty before April.

The wholesale and retail sector also dropped 1.2%m/m. This was mainly driven by the stalling trade in motor vehicles as, once again, consumers rushed to get ahead of tax rises. Fortunately, retail sales grew 1.2% in April, which suggests consumers continued to spend despite tariffs and tax rises.

It wasn’t just retail that had reason for cheer. The construction sector grew 0.9%m/m with most areas contributing strongly thanks to the sunniest April on record.

In terms of what today’s data means for the real economy, which focuses principally on private sector activity, our analysis shows it shrank -0.5% in April to lose some of the above-trend gains we saw in March. Nevertheless, both the UK real economy and official GDP are broadly on track to meet our expectation for a 1.2% expansion, with the real economy still slightly ahead.

Weak April is likely a one-off

As set out in our latest UK Quarterly Economic Outlook, we anticipate modest growth returning from May onwards. Tariffs and taxes clearly distorted April’s GDP figures as activity unwound. Underlying growth is probably around 0.1% a month.

When it comes to the impact on interest rates – important for business investment, household spending decisions, exchange rates and ultimately the chancellor’s thinking coming up to the Autumn Budget after yesterday’s Spending Review – we think the MPC’s view of underlying growth flatlining is slightly too pessimistic.

Consumers and government are increasing spending, which should boost the economy. We therefore expect activity to recover in May and June, raising growth in Q2 to 0.1%.

However, one risk to our view that growth will pick up again comes from ongoing speculation that there’ll be further tax rises in the autumn. This could damage sentiment and prompt consumers to save in anticipation of further tax rises, slowing growth. Fortunately, households have already been building up their savings and wage growth remains strong, which should help soften the blow.

Ultimately, we think April’s contraction overstates the weakness in the economy. Indeed, we see no reason to change our forecast for 1.2% growth this year. The combination of a contraction in April and a weak labour market report is unlikely to prompt the MPC to go for a consecutive rate cut next week, but it does make a cut in August a growing certainty.

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