The UK economy unexpectedly shrank by 0.1% in January, disappointing forecasts and raising concerns just ahead of Chancellor’s spring statement later this month.
The data, released by the Office for National Statistics (ONS), revealed that, contrary to City economists’ predictions of a 0.1% growth, the services sector was unable to offset a significant decline in the industrial sector, resulting in a drop in overall GDP. Manufacturing output fell by 1.1% in January, reversing a modest growth of 0.7% in December 2024. Additionally, the construction sector also dragged down the economy, with adverse winter weather hampering housebuilding activities.
While services saw a modest increase of 0.1%, notable declines in hospitality and arts and entertainment sectors reduced overall growth. However, the ONS reported that GDP had grown by 0.2% in the three months leading up to January 2025, compared to the previous quarter, largely driven by the service sector’s performance.
Yael Selfin, the chief economist at KPMG UK, said: “The UK economy starts the year on the back foot as global uncertainty casts a shadow on the outlook.”
Shadow Chancellor Rachel Reeves attributed the economic downturn to global economic uncertainty and emphasized the need for defense spending to stimulate the economy. She stated: “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. And why we are launching the biggest sustained increase in defence spending since the cold war.”
Mel Stride, the shadow chancellor, echoed concerns over the lack of growth, citing the government’s previous budget decisions. He said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024.” Stride blamed the government’s policies for stifling business confidence: “After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation, this government is a growth killer.” Many business surveys indicate that companies are postponing hiring and investments to preserve capital.
The government’s spending projects have also been delayed while ministers reassess plans set forth by the former Conservative administration. The Chancellor is expected to announce significant cuts to government welfare spending at the spring statement on March 26, as part of efforts to adhere to the government’s budget rules.
December 2024 had seen a 0.4% expansion, helping the final quarter of the year register a 0.1% rise and avoid two consecutive quarters of zero growth.
Despite the weak start to 2025, the Bank of England’s monetary policy committee is not expected to react to the latest data. Financial markets anticipate that interest rates will remain unchanged at 4.5% when the committee meets next week.
Meanwhile, the National Institute of Economic and Social Research (Niesr) forecasts a more optimistic 0.4% growth for the first quarter of 2025, surpassing the Bank of England’s more modest 0.1% projection. However, growth remains fragile due to persistent global and domestic uncertainties.
Hailey Low, an economist at Niesr, stressed the importance of stability in the upcoming spring statement, saying: “It is crucial that the upcoming spring statement provides stability rather than adding to domestic uncertainty. Frequent policy U-turns risk undermining business and investor confidence at a time when clarity and consistency are most needed.”
