Just weeks into Labour’s new government, Chancellor Rachel Reeves has found herself in hot water as fresh figures show the UK economy shrank for the second month in a row.
After a tough April, May’s numbers offered no relief—signaling what many fear could be the start of a deeper economic slump.
Instead of a small bounce-back that many analysts had expected, GDP slipped by 0.1% in May, following a 0.3% drop in April.
And while two straight quarters of negative growth are technically needed for a recession, experts say the UK may already be on the brink.
Reeves Tries to Stay Upbeat Despite the Dip
Rachel Reeves didn’t sugarcoat the figures, admitting the data was “disappointing.”
But she was quick to defend her government’s decisions so far.
In a statement, she listed off a number of policies aimed at helping struggling families: extending the £3 bus fare cap, funding free school meals for over 500,000 more children, promising free breakfast clubs, and raising the minimum wage.
“My top priority is getting more money into people’s pockets,” she said.
“These numbers aren’t what we hoped for, but I remain focused on restarting growth and delivering on our pledges.”
Construction and Manufacturing Take a Hit
So what’s behind the economic slump? According to the Office for National Statistics (ONS), sectors like oil and gas, car manufacturing, and pharmaceuticals saw sharp declines in May.
Construction activity also took a tumble.
While some parts of the economy—like legal services and IT—showed strength, they weren’t enough to balance out the downturn.
Retail, in particular, had a rough month, dragging the services sector back down despite pockets of growth.
Warning Bells Ring Over Autumn Budget and Tax Hikes
One of the big concerns now is how Reeves will balance the books ahead of the Autumn Budget.
With a £30 billion shortfall looming, many fear another round of tax rises may be coming.
Some even speculate she could extend the freeze on tax thresholds, a policy that’s already pulled millions more people into higher tax bands.
According to the Institute for Fiscal Studies (IFS), keeping the freeze going two more years could raise £10 billion annually, but would see another 400,000 people paying income tax, and 600,000 more entering higher brackets.
Tory Criticism Rolls In Hard
The Conservative opposition wasted no time laying into Labour over the figures.
Shadow Chancellor Mel Stride said the economy shrinking under Labour was “a direct result of reckless decisions,” pointing to the party’s reversal of the Rwanda plan and U-turns on energy and welfare policies.
“Labour has hiked taxes, watched inflation nearly double, allowed unemployment to rise, and now faces the slowest growth we’ve seen in years,” Stride said.
“Working people will pay the price.”
Pressure Builds for Wealth Taxes
Within Labour’s own ranks, pressure is growing to consider wealth taxes—something Reeves has so far resisted.
Some MPs argue that the only fair way to plug the gap is by targeting the wealthiest.
But the Treasury’s own watchdog, the OBR, has warned that too much revenue already comes from a narrow slice of taxpayers, making the system risky to push further.
Expert Voices Weigh In
Suren Thiru from the ICAEW said May’s decline was a clear sign of broader weakness.
With both construction and manufacturing contracting and business confidence shaky amid global instability, he said the UK’s short-term growth outlook is “tilting downward.”
Nicholas Hyett from Wealth Club added that while IT and professional services helped prop up services overall, the UK’s economy remains fragile.
He noted that US tariffs, especially on UK cars, and stamp duty changes in housing have taken their toll.
Even with markets performing well, he warned that rising national insurance costs and living wages are putting pressure on labour-heavy sectors like retail and hospitality.
Is a Rate Cut on the Horizon?
All this economic sluggishness may force the Bank of England to act.
Some experts now believe a base rate cut in August is becoming more likely, especially since inflation spiked recently but remains unpredictable.
The big question is whether that move would do enough to restore confidence—or whether the UK’s economic problems run deeper than interest rates can fix.
A Rock and a Hard Place
Rachel Reeves now faces a difficult road ahead.
With slow growth, spending pressures, and limited room to raise more taxes without political blowback, her options are shrinking by the day.
For a Chancellor trying to prove her economic credentials, this is a crucial moment—and one that could define her legacy.