Rachel Reeves 'catastrophe' strikes as new economic bombshell rocks Labour

The unexpected shrinking of Britain’s economy could be “catastrophic” for under pressure chancellor Rachel Reeves, a financial expert has predicted. The nation’s economy unexpectedly shrank in May, fuelled by sharp declines in manufacturing and construction, in a further blow to under pressure Reeves. The Office for National Statistics said gross domestic product fell by 0.1% in May, missing City predictions of a 0.1% monthly expansion.

It was the second month of contraction in a row after a 0.3% drop in April as businesses cut jobs and cancelled investment plans in response to higher taxes and uncertainty created by Donald Trump’s tariff war. The latest figures show declines in construction, oil and gas extraction, car manufacturing and the production of pharmaceuticals outweighed a return to growth in Britain’s dominant service sector.

Manufacturing output had risen sharply in the first three months of the year as businesses rushed to beat the introduction of Trump’s 2 April “liberation day” tariff announcement, fuelling an increase in exports. While a slowdown was likely after US importers filled their inventories, manufacturers have been hit by uncertainty.

Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, said: “This is catastrophic news for the government. The economy is in decline and these figures cement the trend. Starmer and Reeves need to respond to this news, and it needs to be quick. Waiting for the autumn Budget isn’t the pace of change that was sold to their voters."

Sam Kirk, managing director at J-Flex Rubber Products commented: “These figures clearly bring new meaning to Labour’s motto of going ‘further and faster’. The trouble is, it's the wrong direction.”

Ranald Mitchell, director at Charwin Mortgages, described the economy as being on “life support”.

He said: “Another month, another contraction in UK Plc. Production’s down, construction’s down, and services are on life support. If this is the government’s idea of stability, we’re in trouble. The FTSE may be flying, but the real economy’s stuck in reverse. A much needed rate cut in August now looks more likely, which could be a boost to borrowers and a blow to savers.”

Rohit Kohli, director at The Mortgage Stop, added: "This morning’s GDP figures confirm what many of us on the ground have been seeing for months: the economy is shrinking. This government has never had a credible plan for growth. Instead, we’ve seen increased costs for businesses and little incentive to invest, hire or innovate. It’s hard to see how that reduces the deficit or supports recovery. If the Government is good at anything, it’s U-turns — and it’s now time for another. For borrowers, all eyes now turn to the Bank of England. These numbers surely guarantee another base rate cut next month.”

Colin Low, Managing Director at wealth manager Kingsfleet, commented: "It’s generally accepted that economic policies take 6-9 months to feed into financial data. Consequently, a new Government can be allowed a period of grace as much of the early news in their new parliament is a result of their predecessor.

“However, last week we class the first anniversary of the election of the Labour government with their primary objective of ‘growth’. There can now be no doubt that we are seeing quite the opposite. The early policies adopted have only succeeded in slowing the economy.”

Scott Gallacher, director at Rowley Turton, called into question the government's growth promises: "With two consecutive months of GDP declines—even if modest—it’s hard not to ask: where’s the growth Labour promised? The data suggests the UK is stuck in neutral—or even reverse.

“Rachel Reeves needs to find a forward gear and the accelerator pedal, and quickly. Weakness in production and construction hints at stalled investment, while services are flatlining. This stagnation puts pressure on the Bank of England to cut rates in August, which would help borrowers but hit savers, who might want to lock into fixed rates now. Lower rates could support the FTSE. The country’s in such an economic mess that we need big ideas, real action, and actual growth—not just vague competence. Sadly, Labour seem unable to deliver this."

Rob Mansfield, Independent Financial Advisor at Rootes Wealth Management, said the economy is limping aimlessly: He said: “This government has targeted growth but the only thing that's growing is the tax rate on business. We seem to be limping aimlessly towards the Autumn budget, when either taxes will need to go up again or spending will need to be constrained.”

The latest figures come as Labour’s growth plans are under the microscope amid mounting speculation over the need for large tax rises at the autumn budget after Prime Minister Keir Starmer’s high-stakes welfare U-turn this month.

Ministers have warned of “financial consequences” after the government backtracked on changes to disability benefits that would have been worth more than £5bn in savings for the Treasury. That adds to the £1.25bn the Treasury needs to find to cover May’s climbdown on winter fuel payments.

Liz McKeown, ONS director of economic statistics, said that "the economy contracted slightly in May with notable falls in production and construction only partly offset by growth in services. May’s fall in production was driven by oil and gas extraction, car manufacturing and the often-erratic pharmaceutical industry." She added May was a particularly weak month for retail sales.