The news: The UK economy contracted by the most in 18 months in April due to the twin pressures of tariffs and tax increases.

• GDP fell 0.3% MoM, the Office for National Statistics (ONS) said.
• That was worse than the 0.1% decline economists expected, and a sharp reversal from 0.2% growth in March.

Why it matters: The impact of tariffs on the UK’s economy is particularly notable given that the country was relatively lightly affected with duties of just 10%. Even so, monthly exports to the US fell by the most on record following the imposition of those duties, the ONS said.

• Industrial production—particularly for motor vehicles, a key export to the US—also declined in April, after having risen strongly in the first three months of the year due to demand from businesses looking to get ahead of tariffs.
• Nearly 1 in 5 companies with 10 or more employees (17%) expected US tariffs to affect their businesses in May, according to an April ONS survey.

Rising costs for businesses and the expiration of tax breaks on property purchases are adding to those pressures. As of late May, 77% of businesses with at least 10 employees reported an increase in staffing costs over the last three months, up 41 percentage points compared with late February.

How consumers are faring: The UK’s economic challenges are beginning to show up in retail sales data, as trade war uncertainties and the rising cost of living push consumers to prioritize necessities.

• Retail sales rose just 1% YoY in May, the smallest increase in six months, per the British Retail Consortium and KPMG. The gains were driven entirely by an increase in food and drink spending—heightened by sporting events and bank holidays—as shoppers pulled back sharply on discretionary purchases like apparel.
• With grocery inflation at its highest point in 15 months, consumers are buying more private label brands and turning to retailers that can offer them the most value—like Tesco, which reported a 5.1% increase in comparable sales for the most recent quarter.

Our take: The UK economy’s contraction in April sets the stage for another year of tepid growth. Despite a highly publicized (and yet to be finalized) trade deal with the US, macroeconomic uncertainties are set to weigh heavily on corporate and consumer sentiment, while rising household and business expenses will limit investment and consumer spending.