The UK economy contracted by 0.1% in January, official figures showed in a fresh blow to chancellor Rachel Reeves ahead of the spring statement.
The UK’s gross domestic product contracted by 0.1% in January, according to the Office for National Statistics (ONS). It was down from 0.4% growth in December and below analyst estimates of 0.1% growth.
In a surprise to City economists, who expected 0.1% growth in January, the data showed the services sector failed to offset a decline in the industrial sector and maintain growth from the previous month.
The ONS said the output in services sector grew 0.1% in the month, following growth of 0.4% in December. Production fell by 0.9% following growth of 0.5% in December and construction output fell 0.2%, following a decline of 0.2% in December.
Liz McKeown, ONS director of economic statistics, said: "The economy shrank a little in January but grew in the last three months as a whole, with the overall picture continuing to be one of weak growth.
"The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months."
GDP is estimated to have grown by 0.2% in the three months to January, compared with the three months to October, mainly because of growth in the services sector.
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.
"And why we are launching the biggest sustained increase in defence spending since the Cold War, fundamentally reshaping the British state to deliver for working people and their families; and taking on the blockers to get Britain building again."
Hailey Low, associate economist at the National Institute of Economic and Social Research, urged the chancellor to use her spring statement on 26 March to provide stability.
She said: "The UK economy started 2025 on a negative note. Following the lacklustre performance in the second half of 2024, growth remains fragile due to global and domestic uncertainty.
"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."
GDP growth slowdown has left UK falling below the US and Canada in terms of growth across G7 economies, the richest in the world.
Suren Thiru, the Institute of Chartered Accountants in England and Wales’ economics director, has said the drop in economic output has made the spring statement "more problematic".
He said: "These figures confirm an unnerving drop in economic output during January’s financial market turbulence, as a notably poor month for construction and manufacturers severely hindered overall activity.
"The UK’s economic performance may have been similarly downbeat in February, with any boost from consumer spending amid strong wage growth and lower interest rates weakened by the brake on business activity from this torrent of global uncertainty.
"This decline makes the upcoming spring statement more problematic as it reinforces the prospect of a notable downgrade to the Office for Budget Responsibility’s growth forecasts, further undermining the chancellor’s spending plans."
This GDP release will be the last data print before the spring statement on 26 March, when Reeves will present an update on her plans for the UK economy.
The statement is released alongside economic forecasts from the OBR, the independent economic and fiscal forecaster, which gives its assessment on the likely impact of the government’s tax and spending plans.
Nicholas Hyett, investment manager at the Wealth Club, warned this could be the first step towards a recession, saying: "This is not the news the chancellor would have wanted before this month's spring statement, with the economy shrinking when it had been expected to show modest growth.
"Tariffs and increased labour costs were more worries than reality in January, the month covered by these numbers. Those worries will soon be transforming into realities. That leaves plenty of room for economic growth to deteriorate further, with far fewer catalysts to spark an economic recovery. We could be at the start of a long slow slide into recession."
Jochen Stanzl, chief market analyst at CMC Markets, said the figures would increase pressure on the Bank of England to cut interest rates.
He said: “The report underlines that while the services sector has partly offset the decline, the negative impulses from production prevail.
“The structural decline in the production sector is particularly worrying, as it strikes at the heart of industrial value creation and could jeopardise long-term competitiveness.
“Consequently, the pressure for further monetary easing will only intensify.”
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