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The UK economy unexpectedly contracted by 0.1 per cent in January, underscoring the challenge facing chancellor Rachel Reeves as she prepares to deliver a high-stakes Spring Statement this month.
Friday’s monthly GDP figure from the Office for National Statistics was below each the 0.1 per cent growth predicted by economists polled by Reuters and December’s 0.4 per cent. The decline was largely driven by weakness within the production sector.
Reeves is preparing to rein in public spending in her March 26 Spring Statement after disappointing growth and government borrowing figures sparked fears that she is on target to interrupt her fiscal rules.
Growth has largely stalled since May, hitting tax revenues, after the UK economy rebounded from a technical recession initially of 2024.
The Office for Budget Responsibility in October forecast economic growth for 2025 at 2 per cent — double the 1 per cent predicted by economists polled by Reuters. The watchdog is anticipated to release a brand new forecast alongside the Spring Statement.
Suren Thiru, economics director on the Institute of Chartered Accountants, said January’s GDP contraction made Reeves’ Spring Statement “more problematic” because it increased the likelihood that the OBR would downgrade its forecasts, “further undermining the chancellor’s spending plans”.
The pound weakened barely after Friday’s data release, down 0.2 per cent against the dollar at $1.292. Gilts were regular in early trading, with the 10-year yield flat at 4.68 per cent.
The figures come because the fallout from Donald Trump’s escalating trade war has added to the economic strains facing the UK, in addition to the prospect of upper defence spending because the US president disrupts western security alliances.
“The world has modified and across the globe we’re feeling the results,” Reeves said in response to Friday’s figures.
Consequently, she said, “we’re launching the most important sustained increase in defence spending because the cold war, fundamentally reshaping the British state to deliver for working people and their families, and taking up the blockers to get Britain constructing again”.
The Labour party won the final election last July with a promise to kick-start growth, but Reeves has faced criticism over her October Budget, which left businesses bearing the brunt of £40bn in tax increases.
Businesses have warned of job cuts consequently of the measures, which take effect from April.
Paul Dales, economist on the consultancy Capital Economics, said January’s fall in output “highlights the weakness of the economy before the complete effects of the rise in business taxes and the uncertain global backdrop is felt”.
The Bank of England is anticipated to maintain rates on hold at 4.5 per cent at its meeting next week amid signs of a rebound in inflation. Last month, the central bank cut its economic growth forecast for the primary quarter of 2025 to 0.1 per cent, from the 0.4 per cent expected in November.
Despite January’s contraction, Thiru said a rate cut by the BoE next week was “unlikely” as rate-setters would probably need to assess the impact of the rise in employers’ national insurance contributions from the Budget.
Friday’s data cemented traders’ expectations that there might be at the least two further quarter-point rate of interest cuts from the BoE this yr, with the slim probability of a 3rd, in response to levels implied by swaps markets.
In response to Friday’s ONS data, the manufacturing sector contracted 1.1 per cent in January, with a 0.2 per cent decline in construction, while services grew 0.1 per cent.
Liz McKeown, ONS director of economic statistics, said the general picture for the UK economy was of “weak growth”.
Nonetheless, services continued to grow in January, she said, “led by a robust month for retail, especially food stores, as people ate and drank at home more”.
The ONS said the publication of trade data, normally released alongside GDP figures, had been delayed because of errors.
