Rachel Reeves will attempt to shrug off the UK’s anaemic economic performance at her Mansion House speech next week, after the latest official figures showed the economy unexpectedly shrank in May.

The chancellor is expected to say the City is at the heart of her vision for sparking economic growth, as she battles to seize back the narrative after worse than expected GDP figures, and a bleak warning from the Office for Budget Responsibility (OBR) about the state of the public finances.

The economy shrank by 0.1% in May, the Office for National Statistics said, fuelled by sharp declines in manufacturing and construction.

It was the second month of contraction in a row after a 0.3% drop in GDP in April, and amplified speculation that taxes would have to go up again in the autumn budget.

But less than a fortnight after bond markets sold off government debt amid a flurry of speculation about her future, Reeves will claim Labour is creating an economy, “where people and businesses look to the future and talk about hope, about opportunity”.

She will tell City investors at the historic Guildhall on Tuesday that workers and businesses can be “assured of their own capability, and of the ability of our country to boldly face the challenges that lie ahead. And certain of the prize if they succeed, of higher wages and higher living standards.”

Business groups have blamed Reeves’s £25bn increase in employer national insurance contributions, which came into force in April, for weighing on growth, at the same time as Donald Trump’s trade war sapped confidence.

But she is expected to stress in the speech Labour’s determination to deliver security, pointing to the importance of the government’s plans for public investment, as well as recent trade deals with India and the US.

The GDP figures showed that declines in construction, oil and gas extraction, car manufacturing and the production of pharmaceuticals outweighed a return to growth in Britain’s dominant service sector, amid a slump in activity after a strong first quarter.

“These downbeat figures undoubtedly increase anxiety over the health of the UK economy, with tumbling construction and manufacturing activity causing a disheartening decline in overall output,” said Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales.

The data came as Labour’s growth plans are under the microscope amid mounting speculation over the need for large tax rises at the autumn budget after Keir Starmer’s high-stakes welfare U-turn this month.

Ministers have warned of “financial consequences” after the government backtracked on changes to disability benefits that would have been worth more than £5bn in savings for the Treasury. That adds to the £1.25bn the Treasury needs to find to cover May’s climbdown on winter fuel payments.

Mel Stride, the shadow chancellor, said Labour’s U-turns had “created a ticking tax timebomb” for the economy. “Thanks to Labour’s reckless choices the economy actually shrank in May. This will pile even further pressure for tax rises in the autumn.”

Ben Jones, the lead economist at the Confederation of British Industry, said: “With growing fiscal challenges and the autumn budget on the horizon, the chancellor must provide clear reassurance – no new taxes on business and instead offer a commitment to work alongside firms to dismantle barriers to growth.”

However, economists said the slump in April and May did not paint an entirely accurate picture because it reflected businesses shifting activity around government tax changes and Trump’s tariff deadlines.

Britain’s economy had grown rapidly in the first quarter of 2025, outstripping other countries in the G7 with an expansion of 0.7%. However, much of that was driven by exporters scrambling to beat the US president’s 2 April “liberation day” tariff announcement.

Manufacturing output had risen sharply in the first three months of the year amid an increase in exports. The property sector had also boomed before the expiry of a temporary cut in stamp duty in England and Northern Ireland, leading to a slump in activity in April and May.

However, activity is expected to remain subdued over the rest of the year amid heightened uncertainty, elevated borrowing costs and fragile business and consumer confidence. The OBR has forecast GDP growth of 1% for 2025 as a whole but will revisit that projection in the run-up to the autumn budget.

While the UK has struck a deal with the US to mitigate Trump’s steepest tariffs, alongside forging closer ties with the EU, the Bank of England governor, Andrew Bailey, has warned that trade policy uncertainty still clouds the outlook.

Economists widely expect the Bank’s monetary policy committee to cut interest rates from the current level of 4.25% at its next meeting in August, amid mounting concerns over the strength of the economy despite lingering inflationary pressures.

Sanjay Raja, the chief UK economist at Deutsche Bank, said: “For now, weakness in GDP will cement some on the MPC’s fears that demand is loosening faster than expected. An August rate cut looks almost certain. And we expect more to come.”

Unite has voted to suspend the membership of the deputy prime minister, Angela Rayner, and reconsider its ties with Labour over the party’s approach to the Birmingham bin workers’ strike.

Labour’s biggest union donor passed the motion at its policy conference on Friday, although party sources said Rayner had resigned her membership of Unite some months ago.

The motion is a sign of how bad relations have become between Labour and Unite over the dispute about pay and conditions, which the union says would impose pay cuts of £8,000 on some workers.

Bin workers in Birmingham have been striking since January and walked out indefinitely in March, leading to piles of rubbish building up on the city’s streets.

Unite’s move against Rayner appeared to be largely symbolic given the deputy prime minister had already cancelled her membership payments, although she was still recorded as being a member of Unite on the last list of ministerial interests published on 29 May.

However, the threat to cut or further reduce financial ties with Labour could be deeply damaging for the party at a time when it needs to maintain healthy funds to fight off the threats of Reform and the Conservatives.

The Unite general secretary, Sharon Graham, accused Labour-led Birmingham council of carrying out action similar to “fire and rehire” as striking workers were being replaced by agency workers and faced the possibility of redundancy.

“Unite is crystal clear it will call out bad employers regardless of the colour of their rosette,” she said. “Angela Rayner has had every opportunity to intervene and resolve this dispute but has instead backed a rogue council that has peddled lies and smeared its workers fighting huge pay cuts.

“The disgraceful actions of the government and a so-called Labour council, is essentially fire-and-rehire and makes a joke of the Employment Relations Act promises. People up and down the country are asking whose side is the Labour government on and coming up with the answer: not workers.”

Rayner, who is still a member of the Unison trade union, is considered an ally of the unions within Labour and pushed through the party’s package of workers’ rights in the face of opposition from big business.

However, Unite is one of the unions that feel the government betrayed its members in Birmingham, and has also been campaigning with other unions against winter fuel allowance and other benefit cuts.

The Unite motion, which was passed overwhelmingly, said the union was prepared to discuss its relationship with Labour if Birmingham council forced through the redundancies of striking workers.

It suggests Unite could be ready to end hundreds of thousands of pounds in funding for Labour if it severed or suspended its long relationship with the party. Unite gave about £2m to Labour in the year before the election.

It has scaled back its financial support in recent years, with Unison now contributing more, but it is historically the party’s biggest union backer having given more than £70m raised from its members.

The union also voted to suspend the membership of John Cotton, the Labour leader of Birmingham council, who on Wednesday said the council was at the “absolute limit of what we can offer”. The council has not said what its next steps would be but it said this week that it needed to proceed with changes to its services without delay, as the latest round of talks ended without resolution.

Unite’s dispute is with Birmingham city council, but since 2023 the local authority’s finances and governance have been overseen by government-appointed commissioners who are ultimately answerable to the Ministry of Housing, Communities and Local Government.

A Labour source said: “Birmingham city council are independent employers, and the the government is, rightly, not a party in this dispute.

“The deputy prime minister has introduced the biggest upgrade to workers’ rights in decades which will deliver for 15 million workers across the country.”

A No 10 spokesperson said of the strike that the government’s priority has always been Birmingham residents.

There are still issues with uncollected rubbish in Birmingham, although the situation has improved since late March, when the council declared a major incident over the mountains of bin bags on the streets.

In May, the council secured a court order preventing striking bin workers on the picket line from delaying bin lorries leaving depots, which was one of their tactics to ensure the strike had the most impact.

Many regular bin collections have since resumed, with the lorries being staffed by agency workers. But parts of the city, particularly more deprived areas, still have piles of waste in the street, with the smell being exacerbated by the hot weather.

Recycling bin collections in the city of more than a million people have been suspended since early February, with residents told to take their recycling waste to the tip or store it at home. In reality, many people have put it in their general waste bin, with growing concern about the environmental impact of this as the strike drags on.

The videos seem realistic, but a CBC investigation revealed that they were AI-generated, created by online hiring and recruiting firm Nexa, an AI company that develops software other companies can use to recruit new hires.

“I’ll be honest, we do that for fun,” says Divy Nayyar, Nexa’s founder and CEO, according to the report. “You know, some of the videos went extremely viral.”

Nayyar described the videos as a “subconscious placement” of advertising, saying the company created the “Josh” persona as a way of connecting with young people just out of school who are looking for work.

Canadian employers appear to be showing increased interest in conducting job interviews using AI technology, according to a previous report.

‘AI racism’

However, Nexa’s campaign is highly problematic, according to experts.