GDP shrinks in January as UK economy prepares for upcoming tax hikes
The UK economy underperformed expectations in January. According to the latest set of gross domestic product (GDP) figures published by the Office for National Statistics (ONS), the economy shrank by 0.1 per cent in January as output was dragged down by a sharp drop in output in the production sector.
Over the three months to the end of January, the economy grew by 0.2 per cent.
Economists had predicted growth of 0.1 per cent for the first month of the year.
The ONS said the output in services sector grew 0.1 per cent in the month, following growth of 0.4 per cent in December.
Production fell by 0.9 per cent following growth of 0.5 per cent in December and construction output fell 0.2 per cent, following a decline of 0.2 per cent in December.
In the services sector – a key part of the UK economy – of the 14 subsectors, output increased in six, with seven subsectors seeing output decline and one showing no growth in January.
The largest negative contribution came from accommodation and food service activities, which fell by 2.4 per cent.
In production, the sharpest falls were seen in the mining and quarrying segment, down to a 3.7 per cent slide in oil and gas extraction work.
Chancellor of the Exchequer Rachel 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.”
Immediately following the release of the data the pound fell 0.2 per cent against the dollar.
Julian Jessop, Economics Fellow at the Institute of Economic Affairs, said that while “the underlying trend rate of growth is probably still around 0.2% per quarter…this feeble rate would remain well short of the numbers baked into the OBR’s forecasts for last October’s Budget.”
He noted that while “activity could then pick up again once April is out of the way and if the UK continues to avoid the worst of the global trade wars” there remains” is also “a growing risk that the announcement of a further round of tax rises and spending cuts in the fiscal event on 26 March will prolong the doom loop.”
The UK economy has recorded a mixed performance in the months after Labour’s Autumn Budget, raising fears that the Chancellor’s plans have contributed to economic stagnation.
Gross domestic product (GDP) increased 0.1 per cent in November, according to the Office for National Statistics (ONS), which was slower than the 0.2 per cent expansion predicted by City experts.
Suren Thiru, ICAEW Economics Director, 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.
However, some analysts noted the economy could begin to benefit from some of the spending measures announced in the Budget, which are set to come into force over the coming months.
Yael Selfin, Chief Economist at KPMG UK said: “Despite today’s weak GDP data, growth momentum is set to gather at a modest pace over the coming months.
“We expect a pick-up in consumer spending in the first half of the year, underpinned by robust wage growth and a healthy savings buffer. Additionally, the front-loaded spending measures announced in the Autumn Budget are set to come into effect in the first half of this year.”
Mel Stride, shadow Chancellor of the Exchequer, said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024.
“After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation this government is a growth killer.”
He added: “Labour inherited the fastest growing economy in the G7 but since they arrived business confidence has collapsed and jobs are being lost.
“The Chancellor has 12-days until her emergency Budget – she must think again or hardworking people will continue to pay the price of a Labour government without any business experience.”