ONS: UK economy flatlines in January ahead of Iran conflict

The UK economy flatlined in the month to January as businesses and consumers brace for a potential shock due to the conflict in the Middle East.

Gross Domestic Product (GDP) grew by 0%, according to the latest data from the Office for National Statistics (ONS), following sluggish growth of 0.1% in December and 0.2% in November 2025.

The January figure was partly caused by no growth across the services sector and a 0.1% fall in production, offset partially by a 0.2% rise in construction.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

A significant 2.7% drop in food and drink service activities also weighed down on growth across the month, the ONS said.

Meanwhile, data released by the ONS today showed GDP grew by 0.2% in the three months to January 2026.

The month to January data will come as a blow to the chancellor Rachel Reeves following her Spring Statement earlier this month, where she reiterated her goal of making growth one of the cornerstones of her tenure.

What does it mean for interest rates?

The monthly GDP figures will cause consternation among those in government as the conflict in Iran and the Gulf shows no immediate signs of abating.

Prior to the tensions, markets had been pricing in two interest rate cuts by the Bank of England (BoE) in 2026 with inflation on a downward trajectory.

The first of these was widely expected to be announced at the bank’s Monetary Policy Committee’s (MPC) next meeting on 19 March.

The latest figures from the ONS show the Consumer Price Index (CPI) measure of inflation was 3% in January, down from 3.4% in December.

However, the mood has significantly changed since then. Fears are growing that the ongoing tensions in the Middle East could cause global inflation to rise and prompt the BoE to hold or even raise interest rates.

Much of the world’s oil is sourced from the Middle East and the conflict has caused major disruption to global supply, pushing up the price of crude oil.

John Wyn Evans, head of market analysis at wealth manager Rathbones, said: “The fact that there was no growth over December is worrisome, indicating limited momentum even before the inevitable headwinds materialise. Consumers and businesses face higher fuel prices and interest rates are now not expected to fall soon.”

GDP growth in the future ‘likely to remain elusive’

Amid the global context, GDP growth is “likely to remain elusive” further down the line in 2026, according to Yael Selfin, chief economist at accountancy firm KPMG.

She said consumer spending is expected to weaken later in the year due to sharply rising energy prices, although households will be shielded from the worst of it until July, when Ofgem’s price cap covering the July to September period comes into force.

The latest forecasts from analysts at energy market consultancy Cornwall Insights suggest the price cap could rise by as much as 10% due to rising wholesale costs caused by the ongoing conflict in the Middle East.

Selfin also pointed out the government’s borrowing costs have risen in recent weeks and higher interest rates would stunt business growth.

“We expect sluggish momentum to have carried over into February, with activity likely to slow further from March onwards,” she added.

What does GDP mean for you?

GDP is the total value of all the goods and services produced in a country over a set period of time. Rising GDP shows an economy is healthy and falling GDP shows the opposite.

People living in a country with high GDP are likely to have higher incomes and therefore better standards of living.

If these people spend their incomes inside the country, that also boosts takings for businesses who in turn are likely to hire more staff and invest more, creating a snowball effect.

However, GDP rising too fast can cause inflation to surge. This makes interest rate rises by the Bank of England more likely, leading to higher borrowing and mortgage costs.

Falling GDP means fewer goods and services are being produced and sold which can mean reduced incomes, lower consumer spending and a decline in the standard of living.