The UK economy unexpectedly slumped by 0.3% in April, having grown by 0.2% the month before. It is the biggest monthly drop since October 2023. Analysts polled by Reuters had been expecting a smaller drop of 0.1%. Chancellor Rachel Reeves said the figures were “clearly disappointing”.
Tax changes and global trade disruption may have been behind the slowdown, with businesses citing both as concerns.
Employers started paying higher National Insurance contributions from 6 April, after changes announced in last year’s Autumn Budget. Many raised concerns that profitability would take a hit as a result.
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In a survey of 52 leading retailers, conducted by the British Retail Consortium earlier this year, 70% said they were “pessimistic” or “very pessimistic” about trading conditions over the next 12 months. The increased tax burden was cited as a key concern.
Domestic challenges were compounded by global trade disruption in April, with Donald Trump announcing his “Liberation Day” tariffs at the start of the month. Although the worst measures have now been scaled back, higher trade barriers are expected to push costs up for businesses.
When surveyed by the Office for National Statistics (ONS) in late April, 17% of businesses with 10 or more employees said they thought tariffs would impact them over the following month. The most common concerns were reduced demand and having to pass on additional costs to customers.
“While headwinds in April will likely soften in the coming months, they won’t dissipate fully,” said Sanjay Raja, chief UK economist at Deutsche Bank.
“Despite the UK’s trade deal with the US, trade uncertainty is here to stay. The labour market continues to loosen too, which will weigh on household spending. And monetary policy remains restrictive, which will also drag on output.”
It will create a headache for Reeves, who has described economic growth as her “number one mission”.
The chancellor announced a package of measures as part of her Spending Review on 11 June, including a £29 billion annual boost for the NHS, a £39 billion cash injection for social and affordable housing over the next decade, and increased defence spending.
Weak economic growth will make it more difficult to fund these commitments without raising taxes.
Services sector was the main driver of GDP slump
The services sector was the main driver of April’s GDP drop, with output falling for the first time since last October. The sector dropped 0.4% over the month.
There were falls in nine of the 14 subsectors, with the biggest drop coming from professional, scientific and technical activities. This was mainly driven by legal activities.
There was less demand for solicitors and conveyancers during the month after stamp duty thresholds dropped at the start of April. This meant fewer people completed the purchase of a property, having rushed transactions through earlier in the year to beat the deadline.
Production output dropped by 0.6% on a monthly basis, while construction output grew by 0.9%. These sectors generally have less of an impact on the overall growth rate, as they are not as big as the services sector. Services account for around 80% of the UK economy.
On a three-month basis, GDP looked better, growing by 0.7% compared to the previous three-month period. There was growth in all three sectors over this timeline, with services up 0.6%, production up 1.1% and construction up 0.5%.
Despite this, the monthly figure could be “indicative of more difficulty to come,” said Lindsay James, investment strategist at Quilter.
GDP drop is bad news for Rachel Reeves
Until now, GDP growth had been holding up better than expected. The UK was the fastest-growing economy in the G7 in the first quarter of the year. However, if April’s monthly figure is a sign of things to come, the economy could be entering a more challenging period.
“April’s decline is probably the start of a more sobering period for the UK economy with the damage from spiralling costs and intensifying global uncertainty set to slow growth sharply this quarter, despite elevated government spending,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
He echoes the point others have made. Weaker growth will make it more difficult for Rachel Reeves to meet her spending plans without raising taxes. This is because the chancellor’s fiscal rules prevent her from borrowing to fund day-to-day spending.
In the Spending Review, Reeves reiterated that these rules were “non-negotiable”. As a result, many have started to speculate that taxes will rise further this autumn when the Budget is delivered. On the back of £40 billion worth of tax hikes last year, the question is whether any areas have been left untapped.
Any suggestion of more taxes on businesses could harm economic growth further, but taxing working households would squash consumer confidence. Meanwhile, higher wealth taxes on inherited assets and capital gains could push more high-net-worth individuals out of the country, which isn’t good for growth either.
Unless the outlook picks up, Reeves will be left with some tough decisions later this year.
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