The UK economy experienced an unexpected contraction in January, presenting a challenge to the government as it prepares for the upcoming Spring Statement.
Official figures revealed a 0.1% decline in economic activity, falling short of anticipated growth. This downturn was primarily attributed to a decrease in the manufacturing sector.
With economic growth positioned as a key government priority, this setback is expected to influence Chancellor Rachel Reeves’s decisions regarding fiscal policy and adherence to self-imposed rules on taxation and spending.
Reeves asserted that the government must pursue economic growth “further and faster,” while Conservative representatives accused the administration of being “a growth killer.”
Economists had previously projected a 0.1% increase in January, following a 0.4% rise in December. The Office for National Statistics (ONS) noted that monthly figures can be volatile, and estimated a 0.2% growth over the three months leading to January.
“But the overall picture for the UK was one of weak growth,” said Liz McKeown, ONS director of economic statistics. Construction and oil and gas extraction experienced a decline during the month. However, this was partially offset by increased retail activity, particularly in food shops, “as people ate and drank at home more,” she added.
Concerns persist that economic growth will remain sluggish, particularly with tax increases scheduled for April.
Businesses have cautioned that higher National Insurance contributions, rising minimum wages, and reduced business rates relief could hinder economic growth, limiting employers’ ability to offer pay increases and create jobs.
Additionally, businesses are facing uncertainty due to US President Donald Trump’s tariffs, and the government is under pressure to increase defence spending.
Responding to the latest growth figures, Reeves stated, “The world has changed and across the globe we are feeling the consequences.” She also noted that the government was “launching the biggest sustained increase in defence spending since the Cold War,” amidst existing pressures on public spending plans as the chancellor aims to meet self-imposed budget rules.
Last month, the Bank of England reduced its growth forecast for the UK this year. The Office for Budget Responsibility is also expected to downgrade its growth prediction at the Spring Statement, leading to expectations that government spending will be curtailed to meet Reeves’s fiscal rules.
The government is “expected to set out significant cuts to the welfare budget” next week, as part of these cost-saving measures. Conservative shadow chancellor Mel Stride described the Labour government as “a growth killer” after raising taxes and “crushing business with their extreme employment legislation.” Daisy Cooper, the Lib Dem Treasury spokeswoman, stated that Reeves’s growth plan leaves the economy “on life support,” with tax changes “set to hammer small businesses.”
John Dipre, owner of Ashstead Park garden centre, said that changes to National Insurance contributions, reduced rates relief, and an increased minimum wage will “hit us hard.” “It’s going to be very tough,” he said. “If you really want to support growth, you need to be supporting small businesses, that’s what England’s all about.”
Yael Selfin, chief economist at KPMG UK, suggested that predictions of “sluggish growth” will likely lead Reeves to “tighten purse strings” in the Spring Statement. She added that the recent cut to UK aid to fund increased defence spending “is a preview that some departments will see their spending plans squeezed.”
Anna Leach, chief economist at the Institute of Directors, emphasized that while a slight rise or fall in GDP for a single month is not significant, the overall economy remains “quite weak and therefore quite vulnerable.”
She highlighted “notable weaknesses” in car manufacturing, stemming from trade uncertainty due to Trump’s tariffs and fluctuations in electric vehicle adoption targets. She concluded that the UK growth figures “certainly won’t help” in the lead-up to the Spring Statement.
