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The UK financial system unexpectedly contracted by 0.1 per cent in January, underscoring the problem dealing with 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 spot within the manufacturing sector.
Reeves is getting ready to rein in public spending in her March 26 Spring Assertion after disappointing development and better authorities borrowing prices sparked fears that she is on observe to interrupt her fiscal guidelines.
Progress has largely stalled since Might, hitting tax revenues, after the UK financial system rebounded from a technical recession at the beginning of 2024.
Labour MPs and a few cupboard ministers have expressed concern that Reeves is planning politically damaging cuts to ease strain on the general public funds, together with slashing the welfare price range.
“It’s the toughest thing we have had to do,” admitted one ally of the chancellor. Nevertheless, Reeves has dominated out rewriting her fiscal guidelines to permit extra borrowing, forcing her to make what she has referred to as “tough choices”.
Mel Stride, shadow chancellor, urged Reeves to show her March 26 assertion into an “emergency Budget”, together with reversing tax rises on enterprise and abandoning what he referred to as “extreme employment legislation”.
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, mentioned January’s GDP contraction made Reeves’ Spring Assertion “more problematic” because it elevated the probability that the OBR would downgrade its forecasts, “further undermining the chancellor’s spending plans”.
The pound weakened barely after Friday’s knowledge launch and was down 0.2 per cent towards the greenback by late afternoon, buying and selling at $1.293. Gilts had been secure, with the 10-year yield down 0.02 proportion factors at 4.67 per cent.
The figures come because the fallout from Donald Trump’s escalating commerce battle has added to the financial strains dealing with the UK, in addition to the prospect of upper defence spending because the US president disrupts western safety alliances.
“The world has changed and across the globe we are feeling the consequences,” Reeves mentioned in response to Friday’s figures.
Consequently, she mentioned, “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”.
The Labour occasion received 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 on account of the measures, which take impact from April.
Paul Dales, economist on the consultancy Capital Economics, mentioned January’s fall in output “highlights the weakness of the economy before the full effects of the rise in business taxes and the uncertain global 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 lower 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 mentioned a price lower by the BoE subsequent week was “unlikely” as rate-setters would most likely need to assess the influence of the rise in employers’ nationwide insurance coverage contributions from the Price range.
Friday’s knowledge cemented merchants’ expectations that there can be a minimum of two additional quarter-point rate of interest cuts from the BoE this yr, with a small likelihood of a 3rd, in line with ranges implied by swaps markets.
In line with Friday’s ONS knowledge, the manufacturing sector contracted 1.1 per cent in January, with a 0.2 per cent decline in building, whereas companies grew 0.1 per cent.
Liz McKeown, ONS director of financial statistics, mentioned the general image for the UK financial system was of “weak growth”.
Nevertheless, companies continued to develop in January, she mentioned, “led by a strong month for retail, especially food stores, as people ate and drank at home more”.
The ONS mentioned the publication of commerce knowledge, normally launched alongside GDP figures, had been delayed as a consequence of errors.
