The ONS has announced data this morning revealing the latest UK GDP figures. It’s not great news for the Chancellor as UK GDP fell 0.1% in January following a 0.4% surge in December. A slowdown in manufacturing and construction contributed to the contraction according to the ONS, whilst the services sector saw gains from food sales.
For Chancellor Rachel Reeves, who is due to present her Spring Statement on March 26th, this will not be welcome news. The OBR will be putting the final touches to its fiscal analysis – and the UK’s economic environment isn’t exactly helped by all the global uncertainty around right now.
Commenting on today’s GDP data, Danni Hewson, AJ Bell head of financial analysis at AJ Bell said: “Remember that iconic Carlsberg beer campaign? Well, the chancellor might just wish she could bring a bit of that magic to January’s GDP figures.
“As surprises go it’s a pretty unwelcome one, but when you’re talking about an economy bouncing along the bottom, the big picture doesn’t really change that much. The UK is struggling to find the key to the growth that the government says is a priority if people are going to start to feel better about their own financial lives.
“And when you drill into the one main positive from the month, that people had spent more on their weekly food shop, it could be seen as households choosing to batten down the hatches and stay at home rather than spend money out because they’re nervous about the road ahead.
“It’s understandable that they’re nervous when you consider the trade wars which have wrought such havoc on global stock markets this week and seem to have contributed to the decline in manufacturing, with car makers in particular slowing production.
“The auto sector is facing something of a perfect storm, with confusion about EV policies, continued range anxiety from motorists and less cash to splash on shiny new cars, along with nerves about Donald Trump’s trade policies.
“Talk of a potential US recession is also damaging to global confidence, and in the UK that confidence has already been hammered by an increase to employer national insurance which changed business conversations and is still yet to come into play. If the Bank of England’s number crunchers got their forecasts right then the UK is expected to grow by half as much this year as had been thought back in November, and that will have backed Rachel Reeves into a corner.
“The government didn’t want to hold a proper ‘fiscal event’ until next autumn, but with the increase in spending on defence, the ratcheting up of trade tensions and a brittle economy, the Spring Statement is now expected to hold more than just a forecast.”
Rob Morgan, Chief Investment Analyst at Charles Stanley said: “Today’s UK GDP numbers reaffirm the lacklustre state of the economy and will come as a disappointment to the Chancellor as she puts the final touches to her Spring Statement. Having flatlined in the second half of last year, 2025 is off to an inauspicious start with a contraction of 0.1% in January.
“Expectations were not high ahead of today’s numbers coming off the back of a decent print in December, but the outturn will probably disappoint even the pessimists. The year-on-year number of 1% growth indicates an economy stuck in first gear rather than reverse, but with an outlook clouded by an uncertain trajectory of global inflation and additional costs heaped on employers the picture appears to be stagnant at best.
“Can growth pick up? Overall, there could be a small improvement in the short term. Consumers and businesses will continue to benefit from falling interest rates with three cuts made since last summer and another perhaps around the corner. A boost to government spending should also provide a temporary uplift.
“It is likely to prove a struggle though. Many government initiatives including housebuilding and infrastructure investment could be hamstrung by a lack of construction and other skilled workers. Meanwhile, consumer confidence and spending could be jeopardised by a deteriorating employment picture, plus some businesses are expected to retrench following Budget measures that involve higher employment costs.
“The direction of inflation also hangs in the balance with higher energy prices, the impact of elevated employment costs and the wildcard of US tariffs still to unfold. It likely adds up to challenging scenario without concerted efforts to break the cycle of low growth and high government borrowing costs.
“The economic environment is still fragile, and with today’s data the Bank of England’s won’t be having any regrets about last month’s decision to cut interest rates. It’s greater focus on the growing risks to growth is very much warranted, and a further cut to interest rates could be on the cards later this month.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“The UK economy has had a disappointing start to 2025, with monthly real GDP contracting by 0.1% in January largely due to a 0.9% fall in production output. This worse than expected figure follows what had been a surprise 0.4% uptick in growth in December 2024, driven by strength in the services sector. Propped up by the stronger number at the end of last year, real GDP is estimated to have grown by 0.2% in the three months to January 2025.
“On a monthly basis, economic growth can appear to be quite choppy, but the bigger picture shows a stagnant economy. Talks of trade wars are now consistently making headlines, and this is likely to be unhelpful as far as UK consumer confidence is concerned. The government will be pinning its hopes on consumption holding up in the first quarter of the year and that the economy avoids slipping into recession further down the line.
“The Spring Statement is now less than two weeks away, and it is becoming increasingly clear that Chancellor Rachel Reeves finds herself in a very difficult position. The Bank of England recently halved its forecast for economic growth from 1.5% to 0.75% in 2025. Given fiscal headroom is highly sensitive to changes in growth expectations, the previous £9.9bn of headroom will almost certainly no longer be available. The government is between a rock and a hard place given its repeated assurances that it will not raise taxes for working people. The alternative is to cut spending elsewhere and take from what are already stretched resources.
“Today’s figures also provide the last snapshot of the economy before the Bank of England’s interest rate decision next week. While the economy is somewhat reliant on interest rate cuts to shore up consumer confidence, the recent higher than expected rise in inflation means the likelihood of a further rate cut from the Bank remains fairly slim given it will be wary of cutting too much too quickly.
“With hope, the UK economy should see some improvement as we move through 2025, but the impacts of US tariffs are only just beginning to unfold, so we will be wading through a sea of uncertainty for some time yet.”
George Lagarias, Chief Economist at Forvis Mazars comments: “Headwinds may be blowing harder, but that does not mean we should altogether ignore the tailwinds. It should be no surprise that British growth is decelerating, amid a global market correction, stubborn prices, weak external demand and peak policy uncertainty. Manufacturing is slowing down fast and job losses in the sector are the steepest in nearly five years. Consumers and businesses are reticent to make big capital spending decisions, as they fear the worsening global economic landscape.
“However, we feel that conditions may improve. Trade wars will probably eventually level off. Europe, meanwhile, Britain’s biggest trade partner, is eying improved growth conditions as Germany sheds its fiscal restraints. Deregulation could help businesses and increase credit.”
David Morrison, Senior Market Analyst at FCA-regulated fintech and financial services provider, Trade Nation, comments:
“According to the latest figures from the ONS, monthly real GDP is estimated to have fallen by 0.1% in January. This looks to mainly have been caused by a fall in the production sector, after growth of 0.4% in Dec 2024. However, real GDP is estimated to have grown by 0.2% in the three months to January, compared to three months to October 2024 due to a growth in the services sector.
‘The market reaction was muted, with shallow pullbacks in both sterling and pre-open FTSE 100. The latter is firmer this morning, taking its cue from an overnight rally across US stock index futures. The British pound is lower against the US dollar. But this represents some mild profit-taking following sterling’s sharp rally so far this month given overall dollar weakness. President Trump’s tariff strategy has sown confusion and uncertainty across financial markets. Unfortunately, this situation looks set to continue until the US president achieves his aims or comes to some sort of accommodation with his trading partners.”
Douglas Grant, Group CEO of Manx Financial Group, said, Douglas Grant, Group CEO of Manx Financial Group, said: “The latest GDP figures show that UK economic progress remains sluggish, contracting by 0.1% in January, providing little reassurance to SMEs. As the economy nears recession, ongoing cost pressures – fuelled by high input prices and geopolitical factors like trade tariffs – are squeezing margins and dampening consumer spending. This growing investment hesitancy underscores the need for innovative solutions to address the funding gap. UK businesses must rethink their financial approaches to bolster stability and resilience. Regular budget reviews, agile supply chains, and bulk purchase discounts can mitigate rising costs, while adopting new technologies and streamlining operations will enhance productivity and efficiency.
“Research from Manx Financial Group reveals that nearly a third of UK SMEs have paused or scaled back operations due to financial constraints. Whilst this marks an improvement from 40% in the previous year, significant hurdles persist. Access to external financing remains a challenge for around 10% of SMEs, highlighting the need for a more stable and inclusive lending environment. With the SME lending landscape rapidly shifting, Labour must urgently recalibrate its policies to better support these essential businesses.
“Given SMEs’ role in driving growth, employment, and innovation, the Labour Government must create a stable lending environment for their resilience and expansion – although at this stage, the Government’s growth ambition hasn’t yet translated into legislation governing access to financing in the UK . Both traditional and alternative lenders are key to this, as inadequate financing could hinder recovery amid rising taxes, geopolitical tensions, and cost-of-living pressures.”
Jochen Stanzl, Chief Market Analyst at CMC Markets said: “The GDP report is a complete disappointment across the board. It has shown that the Bank of England’s current measures, such as the latest rate cut, have failed to provide the necessary boost. 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 jeopardize long-term competitiveness. Consequently, the pressure for further monetary easing will only intensify. We do see a supportive effect from public investment, yet it is an open secret that, in the long run, structural challenges remain largely unresolved. Only when these issues are addressed will the UK economy be able to fully realize its growth potential. Meanwhile, the FTSE 100, remaining below 8,600 points, remains vulnerable to further sell-offs.”
