Reeves holds the line as UK GDP contracts worse than expected
UK Chancellor of the Exchequer Rachel Reeves’ first Spending Review landed just hours before a stark reminder of the UK’s economic fragility. GDP contracted by 0.3% in April which was worse than expected and is the sharpest monthly decline since mid-2023. The timing could hardly have been worse.
Despite growing signs of economic weakness, the Chancellor opted for a fiscally restrained package, focused on administrative savings and long-term investment continuity. The £9bn in departmental cuts over three years is designed to reaffirm fiscal discipline but does little to address the near-term pressures on growth, employment, and household finances.
With unemployment rising and retail sales stagnating, many had hoped for a more flexible stance. Instead, the government doubled down on its commitment to meet fiscal rules by 2027, leaving the Bank of England increasingly isolated in its role as the economic ‘shock absorber’. Markets are now fully pricing in a 0.25% rate cut in August, with a growing probability of a further cut before year-end.
The Office for Budget Responsibility’s revised forecast — slashing 2025 GDP growth to just 0.6% — reinforces the sense that the UK could be drifting toward stagnation. Yet the Spending Review offered little support for struggling sectors of the economy or local authorities, and little clarity on how future fiscal consolidation will be delivered without reduced public spending.
UK Gilt yields edged lower, reflecting reduced inflation risk and heightened expectations of monetary easing. Sterling, meanwhile, eased against most major currencies, reflecting the market’s view on the UK’s weakening growth outlook and fiscal policy.
While protecting capital investment in green energy and infrastructure sends a positive long-term signal, the lack of short-term counter-cyclical support risks allowing cyclical weakness to become entrenched. The message to markets appears to be that fiscal policy won’t be coming to the rescue any time soon.
Next week’s inflation figures will now take centre stage. A soft print could tip the balance decisively toward an autumn rate cut. But unless fiscal policy begins to engage more directly with the deteriorating data, confidence will remain fragile.
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