Economists suspected that the comfortable growth enjoyed at the beginning of the year might prove to be short-lived, and they appear to be right.
After expanding by 0.7% in the first quarter of the year, output struggled at the start of the second quarter, shrinking by 0.3% in April.
The damp performance is likely to continue, with economists expecting a 0.1% decline over the second quarter.
The dashboard is flashing warning signs.
The economic data for the start of the year was flattered by people bringing forward house purchases to beat the stamp duty holiday deadline as well as businesses racing to get orders out of the door to beat possible US tariffs.
Now that those temporary factors have faded away, we can better gauge the state of the economy. It makes for unpleasant reading.
A hobbled economy
We are still being hobbled by low growth and high taxes, and the two are reinforcing each other.
In a more detailed breakdown, the ONS revealed that the services sector shrank by 0.4%.
Although economists were expecting consumer spending to hold up, businesses are gripped by a crisis of confidence, with higher national insurance contributions forcing them to put up prices.
This led to a drop in sales. At the same time, the legal sector also came crashing down to earth following a drop in house purchases.
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Reeves refuses to rule out tax rises
Consumers have less space than usual to absorb price rises, with utility bills on the up and general inflation proving persistent. Taxes are already at a generational high, and they could go higher if the economy disappoints.
The Chancellor Rachel Reeves‘s headroom against her fiscal rule is tight, with debt interest payments on the country’s debt eating into her room for manoeuvre.
A Reeves or a Trump problem?
The chancellor today pointed to factors outside of her control, hinting towards President Trump’s tariff policy.
Most of Britain’s problems are domestic ones – high government borrowing costs, rising cost of living pressures and higher taxation, but geopolitical forces have also conspired against us.
The production sector, which captures manufacturing, fell by 0.6%. This was driven by a 9.5% drop in the manufacturing of cars, with industry groups warning of a slump in export orders after Trump’s imposition of industry-wide tariffs at the end of March.
British officials are hopeful that the US will start lifting car tariffs this week after a deal was struck back in May, but it still hangs in the balance.
Even then, a new quota limits the scope for companies to grow in the US market. That’s bad news for the likes of JLR, the maker of Jaguars and Land Rovers.
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All this matters for a chancellor with a historically small fiscal headroom. Even small changes in the growth outlook could derail her plans, forcing further tax rises to pay for her spending plans.
She is betting big on investment in infrastructure- trains, nuclear power, social housing – but it could take many years for that to pay dividends, if it pays dividends at all.
In the meantime, the debt continues to grow as she borrows to fund those projects, putting further pressure on her budget to cover the interest payments alone.
It’s a painful feedback loop for the economy.
