UK economy shrinks more than expected in blow to Reeves
The UK economy shrank more than expected in April, official data has shown, suggesting momentum built up in the beginning of this year has already worn away.
New figures published by the Office for National Statistics (ONS) showing a 0.3 per cent contraction come off the back of a strong 0.7 per cent growth in the first quarter, which made the UK the fastest-growing economy in the G7.
City analysts expected GDP to contract 0.1 per cent, according to a Bloomberg poll.
Rachel Reeves, whose £20bn tax raid on employers has added costs to firms and squeezed profits, will now face an uphill battle to deliver higher growth in the near term after economists once again warned that she will have to raise taxes to fund high spending plans laid out during the Spending Review.
Liz McKeown, director of economic statistics at the ONS, said: “The economy contracted in April, with services and manufacturing both falling.
“Both legal and real estate firms fared badly in April, following a sharp increase in house sales in March when buyers rushed to complete purchases ahead of changes to stamp duty.
“Car manufacturing also performed poorly in the first quarter of the year.”
The ONS added real GDP is estimated to have grown 0.7 per cent in the three months to April.
The UK construction sector also upended trends in the UK economy as growth hit 0.9 per cent in April.
Setback for Reeves
Reeves said the latest figures were “clearly disappointed” but pointed to reforms in the Spending Review as part of her mission to deliver higher growth.
“In yesterday’s Spending Review we set out how we’ll deliver jobs and growth – whether that’s improving city region transport, a record investment in affordable homes or funding Sizewell C nuclear power station. We’re investing in Britain’s renewal to make working people better off.”
Reeves is now piling hopes on AI and greater efficiency levels across the civil service in an effort to boost growth as administration costs were cut and technology units saw budgets get inflated at the Spending Review.
The Chancellor may hope that investment in apprenticeships and scientific research may curry favour with economists at the Office for Budget Responsibility (OBR), who are expected to revise forecasts for the UK economy at the Autumn Budget.
Planning reforms and support of more transport links earned an endorsement from the OBR in March but the fiscal watchdog has not yet taken a view on the government’s reforms to workers’ rights, which could undermine growth ambitions according to several business leaders.
Reeves was reminded that she is also at the whim of President Trump as the ONS said April saw the largest monthly fall on record in goods exports to the US after tariff turmoil erupted.
Yael Selfin, chief Economist at KPMG UK, said trade tensions would have “weighed on the economy” while trade deals will likely not prevent “sluggish” growth throughout the rest of the year.
“While the recently announced trade deals offer businesses a degree of policy certainty, tariffs on UK exports to the US are higher than their pre-April levels. This is expected to act as a headwind for UK trade in the medium term,” Selfin said.
“A disappointing outcome in the US-EU trade negotiations would likely have adverse spillover effects on the UK economy.”
Government officials, including Keir Starmer, have echoed economists in claiming the UK cannot “tax [its] way to growth” despite warnings the government may have to plug shortfalls worth up to £20bn in the autumn.
Julian Jessop of the Institute for Economic Affairs said government policies were “at least partly to blame”.
“Job losses appear to be accelerating, wage growth is slowing, and inflation has jumped, which will all continue to weigh on spending,” he said.
“The recovery has clearly stalled. Growth in the second quarter as a whole is now likely to be close to zero.”
UK economy’s tough summer
Higher growth over the summer will be key for the Chancellor as she hopes the UK economy can rebound and provide her with extra funds to spend on Brits.
The OBR and Bank of England, which will be closely monitoring GDP data, currently sees UK growth hitting one per cent this year.
Fledgling productivity and the threat of President Trump escalating global trade tensions once again could put government plans for growth under threat.
The World Bank said this week that the world economy would suffer its worst year since the financial crash in 2008, which is likely to lower confidence at firms looking to export to new trading partners.
Interest rate cuts at the Bank of England could also kick the UK economy into action but rate-setters will be concerned about sticky inflation, which hit 3.4 per cent in the year to April.
Capital Economics’ Paul Dales said: “The economy will be held back by subdued overseas demand and domestic businesses cutting back on spending to compensate for the rise in costs driven by April’s increase in taxes.
“We’re still expecting GDP growth of just one per cent for the year as a whole, which would be no better than last year and is a little weaker than the consensus.”