The UK economy unexpectedly slipped into negative territory at the start of the year, underscoring the difficult environment facing Chancellor Rachel Reeves as she prepares her spring statement on 26 March.
According to figures released by the Office for National Statistics (ONS), gross domestic product (GDP) declined by 0.1 per cent in January, reversing a 0.4 per cent gain in December. Analysts had forecast a modest 0.1 per cent increase.
A sharp 0.9 per cent contraction in the production sector drove the overall decline, while construction activity dipped by 0.2 per cent. The services sector, which accounts for around three-quarters of economic output, managed a 0.1 per cent rise in January, easing from 0.4 per cent growth in December. Over the three months to January, GDP still rose by 0.2 per cent compared with the previous three-month period.
Liz McKeown, director of economic statistics at the ONS, commented: “The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months. However, services continued to grow in January led by a strong month for retail, especially food stores, as people ate and drank at home more.”
Since the October budget, economic growth has trailed expectations, likely compelling Reeves to scale back public spending in order to adhere to her fiscal rules. The chancellor is reportedly looking to reduce welfare payments at a time when the government faces calls to raise defence expenditure, following President Trump’s suggestion that he may roll back US military backing for Europe.
Reeves said: “The world has changed and across the globe we are feeling the consequences. That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our plan for change.”
Yael Selfin, chief economist at KPMG UK, added: “The upcoming spring statement is unlikely to deliver additional fiscal stimulus for the UK economy. The sluggish growth outlook, alongside competing spending pressures, will force the chancellor to tighten purse strings.”
The Office for Budget Responsibility, the government’s official forecaster, is poised to cut its growth estimates and warn that the public finances remain under acute strain. A steep rise in UK borrowing costs, coupled with tepid economic expansion, has depleted much of the £9.9 billion fiscal headroom Reeves preserved at the last budget.
The latest GDP figures do not take into account President Trump’s imposition of tariffs on certain US trading partners in February and March. Economists caution that his unpredictable policy moves could unsettle global commerce and dampen growth further. Stock markets have already experienced marked drops this month.
Hailey Low, associate economist at the National Institute of Economic and Social Research, urged the chancellor to avoid “frequent policy U-turns [that] risk undermining business and investor confidence at a time when clarity and consistency are most needed”.
The Bank of England, which meets next week, is expected to hold interest rates at 4.5 per cent following an uptick in inflation to 3 per cent in January. Economic performance at the end of last year exceeded the central bank’s forecasts, though the momentum appears to have waned.
Meanwhile, the ONS has postponed publication of its monthly trade figures—ordinarily released alongside GDP data—citing data collection problems. The agency is also facing criticism over a lack of responses to a survey that underpins its monthly labour market report.
Sterling slipped by 0.1 per cent against the dollar to $1.29 and was little changed versus the euro at €1.19 after the release of the latest GDP data.
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UK economy contracts in January, signalling a tougher spring statement ahead
