UK economy shrinks in January giving Chancellor a headache | Reaction from the industry to GDP fall

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.

With Rachel Reeves 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 it all points to the likely need for the Chancellor to make cuts to public spending – or hike taxes – especially given all the global uncertainty around right now.

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.”

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.”

Scott Gardner, investment strategist at J.P. Morgan owned digital wealth manager, Nutmeg, said: “The UK economy is stuck in the slow lane, showing no signs of growth in the first month of the year. This latest data just goes to show the mountain to climb for the Chancellor to reclaim momentum and get Britain growing at pace in 2025.

“While retail sales improved in January after a sluggish run into Christmas, manufacturing PMI’s remain in contraction territory. At the same time, consumer confidence stayed low at the start of the year despite wage growth remaining higher than inflation during the final quarter of last year. The latter boost to real incomes could be a potential tailwind for consumption activity in the months ahead.

“All eyes will now be on the Chancellor’s Spring Statement at the end of the month after the Bank of England revised its growth projections downwards for 2025. The Chancellor will hope that the OBR looks favourably on recent decisions to power growth but there are question marks over whether previous measures announced in the Autumn Budget will prove a headwind to the economy in the middle of this year.”

Derrick Dunne, CEO of YOU Asset Management, comments on this morning’s UK GDP figures saying: “Monthly GDP continues to seesaw between growth and contraction. Growth over three months was little better, with a measly 0.2% rise. This reflects that in the final months of the year and the beginning of 2025 businesses were having to begin adjusting to tax rises, while households continued to face higher rate expectations.

“While these short-term data sets are always subject to revision, it does give us a signal of the weakness of the growth as a whole in the UK and uncertainty that abounds in the economy. This is the clearest indication yet that we’re in for a bleak Spring Statement in two weeks from Rachel Reeves.

“These GDP figures are making the Chancellor’s job ever more difficult and the outlook more troubling. A fresh rate decision is also due ahead of the Spring Statement but will likely provide little relief. The Government’s growth agenda is laudable, but it is also a long-term process – one that isn’t going to alleviate problems in the here and now.

“While the Spring Statement has been billed as a routine fiscal update, it is becoming increasingly clear that we could be set for some new tax and spending measures. The situation is simply too serious to simply ignore. Whether this means more tax on wealth, such as inheritance levies, remains to be seen.

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.”