GDP and trade stumble raises chances of August rate cut

A disappointing set of UK economic figures for April has dented optimism over the strength of the country's recovery, with gross domestic product (GDP) contracting 0.3% month-on-month.

The latest data from the Office for National Statistics showed the decline in GDP that was a sharper fall than the 0.1% decline forecast by economists and followed a 0.2% rise in March.

On a three-month rolling basis, the growth rate was 0.7% – matching expectations and unchanged from the previous period.

The April figures raise questions about the durability of recent momentum, but the ONS and some economists noted that there were one-off reasons for the monthly decline and it could also encourage the Bank of England to cut interest rates again soon.  

Services, the dominant sector in the UK economy, were a particular drag, with output down 0.4% after a 0.4% gain in March. This was a key driver behind the overall GDP miss.

Industrial production also contracted, falling 0.6% month-on-month, though this represented a modest improvement from the previous month. On an annual basis, industrial output fell 0.3%, less severe than the 0.7% decline seen in March.

Construction provided a rare bright spot. Output in the sector rose 0.9%, better than the 0.5% gain in March and ahead of forecasts. Retail and R&D activity also showed modest growth.

ONS director of economic statistics Liz McKeown said: "The economy contracted in April, with services and manufacturing both falling. However, over the last three months as a whole GDP still grew, with signs that some activity may have been brought forward from April to earlier in the year."

She noted that a one-off effect had been seen for both legal and real estate firms 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 after growing in the first quarter of the year."

Trade data added to the gloom. The UK's visible trade balance recorded a deficit of £23.2 billion in April, significantly worse than the average forecast of £20.7 billion and the previous month's £19.9 billion shortfall. The total trade balance came in at a £7.0 billion deficit, also wider than both expectations and the March figure of £3.7 billion.

UK trade was hit by tariffs on shipments to the US, where after increasing for each of the four preceding months, "April saw the largest monthly fall on record in goods exports to the United States with decreases seen across most types of goods, following the recent introduction of tariffs", McKeown said.

Market reaction

Reacting to the negative surprise for GDP and trade, money market bets for a Bank of England rate cut in August increased to 86%, up from 81% the previous day and sharply increased from 44% at the start of last week.

Joshua Mahony, analyst at Rostro, noted that for the pound, the EURGBP extend higher "as the prospect of an August rate cut from the BoE grows increasingly likely".

"However, the concerning degree of contraction should be taken in a wider context. Tariff concerns seen in April balance off against a March boost as businesses front-loaded purchases. Stripping out the monthly volatility, the three-month growth rate of 0.7% highlights that despite tariff and tax hurdles, the trajectory remains healthy for the time being."

Economy is more resilient than this one month shows

Some economists were also looking through the one-month data.

Elliott Jordan-Doak at Pantheon Macroeconomics said: "GDP was dragged down by the first month-to-month services output fall since October 2024, and unwinding of tariff-front running."

While GDP was only saved from a larger fall by construction output rising, he said, "we still think the economy is proving resilient to the uncertainty wrought by Donald Trump’s trade war", expecting GDP to improve in May.

He shaved his forecast for the second quarter but still expects GDP to grow 0.2% quarter-to-quarter, down from a call of 0.3% before and the 0.7% growth seen in the first quarter. 

Jordan-Doak added that broader economic conditions remain supportive of growth: "Economic policy uncertainty is looking increasingly like a US-centric bug lately, rather than a feature of the global economy."

Kallum Pickering, economist at Peel Hunt, echoed the theme of distortion: "The pullback marks the first time GDP has declined significantly since October 2024. Although monthly data are prone to revision, taking the April drop at face value indicates some downside risk to our call that GDP will expand by 0.3% in Q2, following the above-trend gain of 0.7% in Q1.”

However, Pickering added that despite the "known distortions" – including a fall in legal activity linked to March's stamp duty changes – affecting April’s data, he continues to expect a 25 basis point rate cut from the BoE at its 8 August meeting, in line with market pricing.

The Bank is expected to hold policy steady at its next meeting next Thursday, 19 June, however.  

Onslaught likely to see growth slow

Sam Miley, head of forecasting at NIESR, said the UK economy "faced an onslaught of headwinds in April", with consumers hit by sharp rises in household bills, and businesses contended with rising employment costs due to several government policy changes coming into effect.

Miley said he expects Q2 growth to slow markedly from Q1.

Sanjay Raja, chief UK economist at Deutsche Bank, said: "While headwinds in April will likely soften in the coming months, they won’t dissipate fully.

"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."

So, while the UK economy has been fairly resilient this year, he expects growth to "track below potential in 2025, before gradually returning to trend next year", noting that some signs of improvement were already evident in recent PMIs surveys and business confidence readings such as the latest Lloyds Business Barometer.