The UK economy hit the brakes in April, suffering its steepest monthly contraction in over a year. A sharp drop in services output – particularly in legal and real estate sectors – dragged GDP down, while car manufacturing slumped and UK exports to the US saw a record-breaking fall.

This downturn follows a brief period of growth and raises serious questions about the resilience of the recovery. Inflation remains stubbornly high, the labour market is showing signs of strain and trade tensions are intensifying. With global pressures mounting and domestic costs climbing – is this the start of a slowdown, or just a temporary stumble on the road to stability?

UK economic activity nosedived in April

Official figures revealed that UK GDP contracted by 0.3% in April 2025, the biggest monthly drop since October 2023 and down from growth of 0.2% in March. The service sector was the biggest driver of the decline in overall GDP (see chart 1), with output dropping by 0.4%. Legal and real estate firms fared particularly badly in April, following a sharp increase in house sales in March when buyers rushed to complete purchases ahead of changes to stamp duty. Production output decreased by 0.6%, with car manufacturing enduring a poor month. In contrast, there was a notable pick-up in activity within construction and research and development.

Record fall in UK exports to the US

UK exports of goods to the US, including precious metals, fell by £2bn in April 2025, the largest monthly decrease since records began in January 1997 and follows four months of consecutive increases (see chart 2). The fall in goods exports to the US is likely linked to the introduction of trade tariffs on goods imported into the US. President Trump initially announced a range of tariffs on imports of goods to the US on 2 April. This record drop in exports to the US in April helped to widen the UK’s trade deficit to £7bn in April 2025 from £3.7bn in March, the largest trade gap since June 2022.

UK inflation to remain above 3%

Official figures suggest that UK inflation eased from 3.5% in April to 3.4% in May 2025. An error in data collection for April meant that it was slightly overstated (April inflation should be 3.4%). However, the Office for National Statistics decided to stick with their original estimate for April (3.5%). Despite these discrepancies, the big picture remains that inflation is well above the Bank of England’s 2% target, meaning that prices are rising too fast for comfort. Numerous conflicting price movements meant inflation was little changed in May. Air fares fell due to the timing of Easter and the associated school holidays affected pricing. However, that was offset by an acceleration in the cost of food, furniture and household goods. Inflation in the UK is facing a turbulent summer with growing geopolitical instability and the fallout from April’s multitude of rising bills and tax rises likely to lift inflation moderately higher from here.

UK jobs market continues to weaken

The UK's unemployment rate rose from 4.4% to 4.6% in the three months to April 2025, the highest rate recorded since the summer of 2021. Separate HMRC data showed that payrolled employment decreased by 109,000 employees in May, compared with April, and is down by 250,000 since the national insurance changes were announced in the 2024 Autumn Budget (see chart 3). By sector, the largest decrease was in the accommodation and food service activities sector, with a fall of 124,000 employees in the last year. These figures suggest that sharply rising national insurance and national living wage costs are pushing more employers in the jobs market to reduce headcount.

Bank of England lines up August rate cut

The Bank of England kept interest rates on hold at 4.25%, the lowest level since March 2023. The Monetary Policy Committee member (MPC) voted 6-3 in favour of this outcome, with the three dissenters voting for a 25 basis points cut. While only three MPC members voted to cut rates, an August policy loosening remains probable with the meeting minutes indicating continued concerns over the UK economy’s vulnerability to growing economic and geopolitical headwinds. With policymakers facing a difficult combination of deepening global turbulence, uncomfortably high inflation and rising oil prices, future interest rate decisions will be more fraught. The next UK interest rate decision will be announced at midday on Thursday 7 August.

Implications for accountants, business owners and the economy

Overall, April’s decline in economic output is probably the start of a more sluggish period for the UK economy with the damage from spiralling costs and intensifying global uncertainty set to slow growth sharply this quarter, despite elevated government spending.

UK economy – what to watch for next month

1. ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity covering the second quarter of 2025 – will be launched on 10 July.
2. The May 2025 UK GDP data, to be released on 11 July, could show that the UK economy returned to growth following April’s decline.
3. The next set of jobs market data, to be released on 17 July, should confirm that conditions have weakened further amid April’s jump in business costs.