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The UK financial 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 point within the manufacturing sector.
Reeves is making ready to rein in public spending in her March 26 Spring Assertion after disappointing development and authorities borrowing figures sparked fears that she is on monitor to interrupt her fiscal guidelines.
Development has largely stalled since Might, hitting tax revenues, after the UK financial system rebounded from a technical recession initially of 2024.
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 probability that the OBR would downgrade its forecasts, “additional undermining the chancellor’s spending plans”.
The pound weakened barely after Friday’s knowledge 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 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 results,” Reeves stated in response to Friday’s figures.
Consequently, she stated, “we’re launching the largest sustained enhance in defence spending because the chilly warfare, essentially 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 social gathering gained 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 because 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 point of the financial system earlier than the total 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 price reduce by the BoE subsequent week was “unlikely” as rate-setters would in all probability wish to assess the affect of the rise in employers’ nationwide insurance coverage contributions from the Price range.
Friday’s knowledge cemented merchants’ expectations that there shall be at the very least two additional quarter-point rate of interest cuts from the BoE this yr, with the slim probability of a 3rd, in accordance with ranges implied by swaps markets.
Based on Friday’s ONS knowledge, 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, stated the general image for the UK financial system was of “weak development”.
Nevertheless, providers continued to develop in January, she stated, “led by a robust month for retail, particularly meals shops, as individuals ate and drank at residence extra”.
The ONS stated the publication of commerce knowledge, normally launched alongside GDP figures, had been delayed resulting from errors.
