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The UK economic system unexpectedly contracted by 0.1 per cent in January, underscoring the problem going through 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 under each the 0.1 per cent development 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 development and better authorities borrowing prices sparked fears that she is on monitor to interrupt her fiscal guidelines.
Development has largely stalled since Might, hitting tax revenues, after the UK economy rebounded from a technical recession at the beginning of 2024.
Labour MPs and a few cupboard ministers have expressed concern that Reeves is planning politically damaging cuts to ease stress on the general public funds, together with slashing the welfare finances.
“It’s the hardest factor we’ve needed to do,” admitted one ally of the chancellor. Nonetheless, Reeves has dominated out rewriting her fiscal guidelines to permit extra borrowing, forcing her to make what she has referred to as “robust selections”.
Mel Stride, shadow chancellor, urged Reeves to show her March 26 assertion into an “emergency Price range”, together with reversing tax rises on enterprise and abandoning what he referred to as “excessive employment laws”.
The Workplace for Price range Duty in October forecast financial development for 2025 at 2 per cent — double the 1 per cent predicted by economists polled by Reuters. The watchdog is predicted 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 chance that the OBR would downgrade its forecasts, “additional undermining the chancellor’s spending plans”.
The pound weakened barely after Friday’s knowledge launch and was down 0.2 per cent towards the greenback by late afternoon, buying and selling at $1.293. Gilts have been steady, with the 10-year yield down 0.02 proportion factors at 4.67 per cent.
The figures come because the fallout from Donald Trump’s escalating commerce struggle has added to the financial strains going through 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 improve in defence spending because the chilly struggle, 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 celebration received the final election final July with a promise to kick-start development, however Reeves has confronted criticism over her October Price range, 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 complete results of the rise in enterprise taxes and the unsure international backdrop is felt”.
The Financial institution of England is predicted 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 development 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 charge 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 Price range.
Friday’s knowledge cemented merchants’ expectations that there might be no less than two additional quarter-point rate of interest cuts from the BoE this yr, with a small probability of a 3rd, in line with ranges implied by swaps markets.
In keeping with Friday’s ONS knowledge, the manufacturing sector contracted 1.1 per cent in January, with a 0.2 per cent decline in building, 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 development”.
Nonetheless, companies continued to develop in January, she stated, “led by a powerful month for retail, particularly meals shops, as individuals ate and drank at dwelling extra”.
The ONS stated the publication of commerce knowledge, often launched alongside GDP figures, had been delayed resulting from errors.
