The UK economy unexpectedly shrank in January, a blow to the government ahead of its Spring Statement later this month. Data shows the UK economy contracted by 0.1%, a weaker-than-expected result primarily due to a decline in manufacturing. The government has made boosting economic growth its top priority, but the weak economy is expected to impact Chancellor Rachel Reeves' decisions as she struggles to adhere to her self-imposed tax and spending rules.
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03-15, 2025Reeves stated that the government needs to "do more, and faster" on the economy, but the Conservatives have accused Labour of being "growth killers." Economists had previously predicted the economy would grow by 0.1% in January, following a 0.4% expansion in December. Monthly figures can be volatile, and the Office for National Statistics (ONS) said the UK economy is estimated to have grown by 0.2% in the three months to January. Liz McKeown, ONS director of economic statistics, stated that the overall picture of the UK economy is one of sluggish growth.
The construction industry and the oil and gas extraction sectors performed poorly. However, the retail sector, particularly food stores, partially offset these negative effects "as people ate and drank more at home." With tax increases coming in April, concerns remain that economic growth will remain subdued for some time. Businesses warn that increased National Insurance contributions, coupled with a rise in the minimum wage and reduced business rates relief, could impact the economy's ability to grow, with employers expected to reduce cash available for pay rises and new job creation.
Furthermore, businesses are facing new uncertainties from tariffs imposed by US President Donald Trump, while the government also faces pressure to increase defense spending. Responding to the latest growth figures, Reeves said: "The world has changed and we are feeling the consequences globally." She stated that the government is "embarking on the biggest sustained increase in defense spending since the Cold War," but this comes at a time when public spending plans are under pressure as the Chancellor seeks to adhere to her self-imposed budget rules.
KPMG UK chief economist Yael Selfin said the forecast of "sluggish growth" means Reeves is likely to "tighten the purse strings" in the Spring Statement. She added that the recent cuts to UK aid to fund increased defense spending "foreshadowed a squeeze on spending plans in some departments." Anna Leach, chief economist at the Institute of Directors, said that small increases or decreases in GDP in a single month are not significant, but what matters is that the overall economy is "fairly weak and therefore quite vulnerable."
