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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 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 point 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 observe to interrupt her fiscal guidelines.
Progress has largely stalled since Might, hitting tax revenues, after the UK economy rebounded from a technical recession at first of 2024.
Labour MPs and a few cupboard ministers have expressed concern that Reeves is planning politically damaging cuts to ease strain on the general public funds, together with slashing the welfare funds.
“It’s the hardest factor now we have 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 “powerful decisions”.
Mel Stride, shadow chancellor, urged Reeves to show her March 26 assertion into an “emergency Funds”, together with reversing tax rises on enterprise and abandoning what he referred to as “excessive employment laws”.
The Workplace for Funds 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 anticipated to launch a brand new forecast alongside the Spring Assertion.
Suren Thiru, economics director on the Institute of Chartered Accountants, mentioned 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 and was down 0.2 per cent in opposition to the greenback by late afternoon, buying and selling at $1.293. Gilts have been steady, with the 10-year yield down 0.02 share factors at 4.67 per cent.
The figures come because the fallout from Donald Trump’s escalating commerce conflict 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 mentioned in response to Friday’s figures.
Because of this, she mentioned, “we’re launching the largest sustained enhance in defence spending for the reason that chilly conflict, basically reshaping the British state to ship for working individuals and their households, and taking over the blockers to get Britain constructing once more”.
The Labour occasion gained the final election final July with a promise to kick-start development, 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 because of the measures, which take impact from April.
Paul Dales, economist on the consultancy Capital Economics, mentioned January’s fall in output “highlights the weak point of the economic system earlier than the complete 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 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 mentioned a charge reduce by the BoE subsequent week was “unlikely” as rate-setters would in all probability need to assess the influence of the rise in employers’ nationwide insurance coverage contributions from the Funds.
Friday’s information cemented merchants’ expectations that there will probably be no less than two additional quarter-point rate of interest cuts from the BoE this 12 months, with a small likelihood of a 3rd, based on ranges implied by swaps markets.
In keeping with Friday’s ONS information, the manufacturing sector contracted 1.1 per cent in January, with a 0.2 per cent decline in building, whereas providers grew 0.1 per cent.
Liz McKeown, ONS director of financial statistics, mentioned the general image for the UK economic system was of “weak development”.
Nonetheless, providers continued to develop in January, she mentioned, “led by a robust month for retail, particularly meals shops, as individuals ate and drank at residence extra”.
The ONS mentioned the publication of commerce information, often launched alongside GDP figures, had been delayed on account of errors.
