UK GDP returns to 0.1% growth in May, beating subdued forecasts

UK GDP returned to growth in May, but the 0.1% expansion masks a fragile economy buffeted by supply-chain disruptions.

The UK economy eked out 0.1% growth in May, rebounding from April's 0.1% contraction but undershooting the pace needed to sustain the first quarter's momentum as supply-chain disruptions from the Iran conflict weighed on production and construction.

"The growth outlook is further threatened by volatile energy costs, which will likely dampen economic activity in the near future," said Fergus Jimenez-England, associate economist at the National Institute of Economic and Social Research.

Services drove the recovery with a 0.3% expansion, while production fell 0.5% and construction dropped 0.8%, the Office for National Statistics reported. In the three months through May, GDP rose 0.7%, easing from an upwardly revised 0.8% in the three months to April. The economy grew 0.6% in the first quarter but is tracking just 0.3% in the second quarter, according to Pantheon Macroeconomics.

The data leaves the Bank of England in a bind ahead of its July 30 rate decision. Pantheon economist Rob Wood said solid growth makes a rate hike "more likely than a cut," while the Iran-driven energy shock threatens to squeeze households and businesses further. GBP/USD held firm above recent lows as softer US producer inflation weighed on the dollar, giving the pound some breathing room.

The ONS said businesses across manufacturing, hospitality, travel and entertainment reported that the Middle East conflict had disrupted global supply chains. Nearly five months of fighting, with the US-Iran peace deal largely collapsed, are pushing fuel and energy costs higher, threatening to slow growth through the rest of the year.

A Treasury spokesperson said the government has "the right economic plan, which has put the UK in a much stronger position than two years ago with the fastest growth in the G7 in the first quarter." Both the OECD and the International Monetary Fund recently upgraded their UK growth forecasts for 2026.

Rate Path Hangs on Data

The Bank of England's next decision on July 30 will be shaped by whether the second-quarter slowdown proves temporary or marks the start of a deeper deceleration. The last time the UK economy posted back-to-back monthly contractions was during the 2023 mini-recession, when GDP shrank 0.1% in September and 0.3% in October of that year. Markets are pricing a prolonged hold, with Wood noting that "solid growth is one reason that a hike is more likely than a cut."

This article is for informational purposes only and does not constitute investment advice.