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Investing.com - The U.K. economy contracted sharply in April, hit by the double impact of higher taxes and a rise in energy prices.
Data released earlier Thursday by the Office for National Statistics showed that U.K. gross domestic product dropped by 0.3% in April on a monthly basis, reversing to a degree the 0.7% growth seen in the first three months of the year.
This was a more substantial contraction that the 0.1% drop widely expected.
On an annual basis, the U.K. economy expanded by 0.9% in the month, retreating from growth of 1.1% seen in the prior month.
The month of April saw water bills rise, energy bills spiral and higher employers’ national insurance contributions kick into effect, highlighting the difficulties U.K. firms faced in dealing with added cost pressures and U.S. President Donald Trump’s tariff turmoil.
U.K. Chancellor Chancellor Rachel Reeves unveiled her latest spending review on Wednesday, pledging increased funding for government departments alongside substantial investments in infrastructure, defense, and social housing.
Reeves announced that government departmental budgets will increase by 2.3% annually in real terms as part of her plan to allocate more than £2 trillion in public spending.
The Bank of England meets next week and faces a tricky decision, having cut its base rate by 25 basis points to 4.25% in May.
Growth has stagnated, unemployment is at its highest level since July 2021, but U.K. inflation is above target at 3.5% and forecast to continue to rise.
BoE Governor Andrew Bailey said last week the pace of interest rate cuts is now ’shrouded in a lot more uncertainty’, citing ’heightened unpredictably’ as U.S. President’s Donald Trump’s trade tariffs weigh on the global economy.
That said, the BoE is forecast to keep its base rate on hold at 4.25%, with markets pricing in two further rate cuts this year - likely in August and then in the final three months of the year - taking the key rate down to 3.75% by the end of the year.