UK GDP: Economy went into reverse in January

The UK economy went into reverse in January, driven by a slowdown in the production sector.

UK GDP fell by 0.1% on a monthly basis, according to the latest figures from the Office for National Statistics (ONS). Analysts had forecast a positive growth rate of 0.1%.

The disappointing January data follows on from a better-than-expected month in December, when the economy grew by 0.4%.

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“The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months,” said Liz McKeown, director of economic statistics at the ONS.

Production output fell by 0.9% month-on-month, while construction output fell by 0.2%. Only the services sector saw growth, at 0.1%.

On a three-month basis, the economy grew by 0.2% in January (three months to January versus three months to October), up from 0.1% in December. Despite this, the overall picture is still one of weak growth.

It continues the headache for beleaguered UK chancellor Rachel Reeves, who will deliver her Spring Forecast later this month.

The statement is not meant to be a major fiscal event, but weak growth and high borrowing costs have eroded the chancellor’s fiscal headroom, meaning spending cuts now look likely.

Reeves has already faced backlash since becoming chancellor last year, after announcing a hike to employers’ National Insurance contributions in her inaugural Budget. Critics argue that, by raising costs for businesses, this will push inflation higher and dampen economic growth.

Commenting on January's GDP figures, Paul Dales, chief UK economist at consultancy Capital Economics, said: "The fall in real GDP in January highlights the weakness of the economy before the full effects of the rise in business taxes and the uncertain global backdrop is felt.”

He added that December’s surprisingly strong growth rate of 0.4%, published last month, might have distorted the picture, making the economy look stronger than it actually was.

Dales said: “Only a small part of the fall in GDP in January appears to be due to the unusually bad weather, with the 0.2% month-on-month decline in construction output only as bad as the 0.2% month-on-month drop the month before. Instead, most of the weakness is just payback from the surprisingly strong 0.4% month-on-month rise in GDP in December.

“In other words, December’s figures made the economy look stronger than it really was and January’s make it look a bit weaker. The truth is probably that the underlying pace of growth is a little bit above zero.”

A gloomy picture for the UK economy?

You could be forgiven for feeling downbeat about the global economy given the negative headlines in recent weeks.

Inflation is back on the rise, and is expected to hit 3.7% in the third quarter of this year.

The Bank of England also halved its 2025 growth forecast from 1.5% to 0.75% at the last Monetary Policy Committee meeting in February.

Tax changes in April could contribute to the inflationary picture, dampen economic growth, limit pay rises and potentially even result in redundancies.

Furthermore, Donald Trump’s erratic trade policy is expected to have global ramifications, pushing prices up and dragging growth rates down.

Despite this, all is not “cheerless, dark and deadly”, to borrow from William Shakespeare.

The Bank of England has expressed that it is not overly concerned about the current UK inflation forecast.

Although the rate of price increases is creeping back up, energy prices are the main driver. These are a global factor, whereas the Bank is more focused on domestic price pressures. These have been making better progress.

Economists are currently forecasting around three more interest rate cuts before the end of the year, which should ease some of the pressure on UK households and businesses.

Although Trump’s hostile trade policy remains a risk, the UK currently looks like less of a target than other trading partners. So far, the president has primarily focused on Canada, Mexico, China and the European Union (EU).

While an escalating trade war could push prices up and slow growth on a global scale, the UK is starting to look like a place of relative stability in an increasingly unstable world.

For the first time in a long time, UK equities have outpaced their US and global counterparts so far this year, giving some domestic investors reason for cautious optimism.