The UK economy has contracted for two consecutive months! The US tariffs and multiple cost pressures may lead to stagnation risks in the second quarter

According to the Zhitong Finance APP, data released by the UK National Statistics Office on Friday shows that the UK economy has contracted for the second consecutive month due to the impact of US tariffs and multiple cost pressures. In May, the Gross Domestic Product (GDP) fell by 0.1% month-on-month, a slight narrowing from the 0.3% contraction in April, but still significantly below the 0.1% positive growth predicted by economists' surveys. This performance puts the UK at risk of overall stagnation in the second quarter; if the output decline in June reaches 0.4% or more, the quarterly economy will show a significant deterioration compared to the 0.7% growth in the first quarter.

After the data was released, the British pound continued to decline against the US dollar, falling 0.3% to $1.3545 on the day. The Labour government is facing dual pressures: on one hand, it needs to support fiscal spending targets through economic growth, and on the other hand, recent policy reversals (such as the 180-degree turn on welfare cuts and winter fuel subsidies for pensions) have exacerbated fiscal difficulties. Chancellor of the Exchequer Rachel Reeves stated in a statement that the data is "disappointing" and emphasized that "economic growth must be promoted."

Manufacturing and construction have become major drags, with May output recording the largest decline in nearly 18 months. Analysts point out that this is directly related to the continuation of economic weakness from April, US tariff pressures, and rising costs such as household energy bills and property taxes. Despite the government's attempts to reach a trade agreement with the Trump administration, UK exports to the US have not escaped the shadow of the £2 billion plunge in April, rebounding by only £300 million in May.

The service sector also performed poorly, growing only 0.1% that month. Retail sales plummeted, and Bank of England Governor Andrew Bailey warned that businesses are delaying investments due to uncertainty. The 0.7% growth in the first quarter was mainly due to exporters accelerating production before the US tariffs took effect, and homebuyers completing transactions early to avoid the increase in transaction tax on April 1, which boosted the business of lawyers and real estate agents.

The economic environment in the second quarter has significantly worsened: in addition to trade disruptions, employers also have to bear an additional £26 billion in payroll taxes, regulated price increases for railway fares and water bills, along with an increase in property stamp duty. Since the budget was released last October, businesses have laid off more than 250,000 people to cope with the sharp rise in the minimum wage.

As inflationary pressures ease, the money market expects the Bank of England to start cutting interest rates in August, with another cut before the end of the year and further easing in 2026. Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, pointed out: "The May data confirms that the growth in the first quarter was merely a one-off phenomenon, essentially a concentrated release of economic activity before the US 'liberation day' tariffs took effect." This analysis highlights the vulnerability of the UK economy under policy fluctuations and external shocks