UK economy shrinks by 0.3%

The UK economy contracted by 0.3% in April, a sharper downturn than anticipated, according to figures released by the Office for National Statistics (ONS). This follows a 0.2% expansion in March and surpasses economists’ forecast of a modest 0.1% decline, adding pressure on the government as it promotes a pro-growth agenda.

The downturn was driven primarily by a 0.4% fall in services output, which includes the legal and property sectors. Legal activity alone plunged 10.2%, linked to recent changes in Stamp Duty rules that appear to have temporarily frozen transactions in these markets. Meanwhile, production output declined by 0.6%, though construction provided a bright spot, rising 0.9% over the month.

Nicholas Hyett, investment manager at Wealth Club, attributed the downturn to a range of mounting pressures. “The UK economy is facing a cocktail of headwinds to growth and slowed more than expected in April as a result,” he said. “In the very short term the change to Stamp Duty rules have put the legal and property services on ice. New barriers to trade with the US and changes to employment costs, from a higher living wage and increased national insurance contributions, are a longer term challenge.”

Hyett added that front-loaded activity earlier in the year may have masked underlying weakness. “It looks like work was pulled forward to earlier in the year to avoid those headwinds and as a result we’re now seeing the inevitable economic hangover,” he said.

The timing of the data presents an unwelcome backdrop for Chancellor Rachel Reeves, the Wealth Club noted. Reeves has championed economic growth in recent public statements. Yesterday, she unveiled her Spending Review, pledging increased investment in public services and infrastructure. However, a contracting economy could hinder the government’s ability to generate sufficient tax revenue to fund these commitments.

“Not only has the government consistently emphasised economic growth as a priority,” Hyett said, “But a shrinking economy will struggle to deliver the tax revenues the Chancellor needs to make the big spending commitments she outlined yesterday.”

There was some encouragement in the construction sector, which has seen continued support from infrastructure investment. “The Chancellor will hope that the infrastructure binge that seems to be supporting the construction sector provides a little extra fuel to get the economy through this lull,” Hyett noted.

Meanwhile, Neil Leitch, managing director of development finance at Hampshire Trust Bank, commented: “Another month of growth in private housing is an encouraging sign of resilience in the market. Developers are finding ways to move forward despite challenging conditions, but we cannot ignore the biggest hurdle they face: the planning system. Painfully long waits for approvals are still holding back delivery of much-needed homes.

“The government’s recent proposals to streamline the system for SME developers are a welcome signal, and it is positive to see the issues raised by the industry starting to gain traction. But we have to be clear-eyed about what this will achieve in practice. Without serious and sustained investment in local planning departments, the system simply lacks the capacity to deliver faster outcomes.”

Leith added: “Policy ambition alone is not enough. Developers are dealing with an unpredictable system where delays can derail project timelines, add cost pressures and affect funding viability. Until those practical realities are addressed on the ground, it will remain an uphill battle to get anywhere close to the government’s long-standing ambition of building 300,000 new homes per year.”

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