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The UK economic system unexpectedly contracted by 0.1 per cent in January, underscoring the problem dealing with chancellor Rachel Reeves as she prepares to ship a high-stakes Spring Assertion this month.
Friday’s month-to-month GDP determine from the Workplace for Nationwide Statistics was beneath each the 0.1 per cent progress predicted by economists polled by Reuters and December’s 0.4 per cent. The decline was largely pushed by weak spot within the manufacturing sector.
Reeves is getting ready to rein in public spending in her March 26 Spring Assertion after disappointing progress and authorities borrowing figures sparked fears that she is on monitor to interrupt her fiscal guidelines.
Progress has largely stalled since Might, hitting tax revenues, after the UK economic system rebounded from a technical recession firstly of 2024.
The Workplace for Funds Duty in October forecast financial progress for 2025 at 2 per cent — double the 1 per cent predicted by economists polled by Reuters. The watchdog is anticipated to launch a brand new forecast alongside the Spring Assertion.
Suren Thiru, economics director on the Institute of Chartered Accountants, stated January’s GDP contraction made Reeves’ Spring Assertion “extra problematic” because it elevated the probability that the OBR would downgrade its forecasts, “additional undermining the chancellor’s spending plans”.
The pound weakened barely after Friday’s information launch, down 0.2 per cent towards the greenback at $1.292. Gilts had been regular in early buying and selling, with the 10-year yield flat at 4.68 per cent.
The figures come because the fallout from Donald Trump’s escalating commerce warfare has added to the financial strains dealing with the UK, in addition to the prospect of upper defence spending because the US president disrupts western safety alliances.
“The world has modified and throughout the globe we’re feeling the implications,” Reeves stated in response to Friday’s figures.
In consequence, she stated, “we’re launching the most important sustained enhance in defence spending for the reason that chilly warfare, basically reshaping the British state to ship for working individuals and their households, and taking up the blockers to get Britain constructing once more”.
The Labour social gathering gained the overall election final July with a promise to kick-start progress, however Reeves has confronted criticism over her October Funds, which left companies bearing the brunt of £40bn in tax will increase.
Companies have warned of job cuts on account of the measures, which take impact from April.
Paul Dales, economist on the consultancy Capital Economics, stated January’s fall in output “highlights the weak spot of the economic system earlier than the total results of the rise in enterprise taxes and the unsure world backdrop is felt”.
The Financial institution of England is anticipated to maintain charges on maintain at 4.5 per cent at its assembly subsequent week amid indicators of a rebound in inflation. Final month, the central financial institution reduce its financial progress forecast for the primary quarter of 2025 to 0.1 per cent, from the 0.4 per cent anticipated in November.
Regardless of January’s contraction, Thiru stated a price reduce by the BoE subsequent week was “unlikely” as rate-setters would most likely wish to assess the influence of the rise in employers’ nationwide insurance coverage contributions from the Funds.
Friday’s information cemented merchants’ expectations that there might be at the very least two additional quarter-point rate of interest cuts from the BoE this yr, with the slim likelihood of a 3rd, in response to ranges implied by swaps markets.
In response to Friday’s ONS information, the manufacturing sector contracted 1.1 per cent in January, with a 0.2 per cent decline in development, whereas companies grew 0.1 per cent.
Liz McKeown, ONS director of financial statistics, stated the general image for the UK economic system was of “weak progress”.
Nevertheless, companies continued to develop in January, she stated, “led by a powerful month for retail, particularly meals shops, as individuals ate and drank at residence extra”.
The ONS stated the publication of commerce information, normally launched alongside GDP figures, had been delayed because of errors.
