The UK economy experiences the most severe contraction in 18 months, with interest rate cut expectations soaring

Due to the impact of tariffs, the UK economy faced its most severe blow in April in 18 months.

On Thursday, the Office for National Statistics (ONS) reported that the UK's GDP growth rate turned negative in April, shrinking by 0.3%, far exceeding the expected contraction of 0.1%.

This marks the most significant monthly decline in the UK economy in 18 months and signifies the complete end of the brief recovery earlier this year—where GDP grew by 0.7% in the first quarter, outpacing the Eurozone and the United States.

In terms of market reaction, traders began adjusting their positions almost simultaneously with the data release, raising expectations for the Bank of England's interest rate cuts this year to 52 basis points.

However, some analysts pointed out that the current inflation rate in the UK remains well above the Bank of England's target of 2%, limiting the scope for monetary policy easing—compared to the European Central Bank, the Bank of England has significantly less room to cut rates and may adopt a more cautious stance.

Tariff Policies Deal a Heavy Blow to UK Exports

The ONS noted that the record drop in exports to the US directly dragged down overall economic performance.

Before the implementation of the tariff policy, a surge in purchases by American importers had led to a spike in UK factory production at the beginning of the year, but after the policy took effect in April, demand plummeted, and factory output fell sharply. The UK's dependence on foreign trade was laid bare at this moment.

Paul Dales, Chief UK Economist at Capital Economics, bluntly stated:

“The strong growth in the first quarter is not sustainable.”

The deterioration of the global trade environment has left local businesses in a wait-and-see mode. Alpesh Paleja, Vice Chairman of the Confederation of British Industry (CBI), stated in an interview:

“Business investment is the area most affected by uncertainty, and the increase in global trade barriers has further exacerbated cautious sentiment.”

Andrew Bailey, Governor of the Bank of England, recently admitted to lawmakers that businesses across the country are generally reflecting that investment, as an “irreversible decision,” is more inclined to wait in the current environment.

Structural Issues Intensify Economic Concerns

In addition to external shocks, the UK economy is also mired in its own chronic issues.

Analysts pointed out that long-term low investment and stagnant productivity have already weakened the foundation for economic growth in the UK, while consecutive shocks from Brexit and the pandemic have further undermined its economic resilience.

Although previously, UK Prime Minister Keir Starmer promised to increase defense spending, and UK Chancellor of the Exchequer Rachel Reeves announced a multi-billion-pound new spending plan, CBI's Paleja warned that these measures are unlikely to boost growth in the short term:

“Housing construction takes time, and the economic effects will not be immediately apparent.”

The new tax reform policies that took effect in April have also added burdens to businesses. Increased employer tax burdens and minimum wage hikes have directly raised operating costs Economists also warn that the labor market, which has shown resilience in a sluggish economy, may soon face a surge in unemployment rates. Matthew Ryan, a market strategist at financial services company Ebury, commented:

"UK businesses are caught in a perfect storm, with hiring freezes and layoff pressures increasing simultaneously."