UK Economy Shrinks by 0.1% in January, Raising Concerns Over Growth Plans

By Staff, Agencies

The UK economy unexpectedly contracted by 0.1% in January, dealing a blow to Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer’s economic agenda, according to the Office for National Statistics [ONS].

The decline came as a surprise, with economists having anticipated a modest 0.1% increase in GDP at the start of the year.

Despite the monthly decline, the economy grew by 0.2% over the three months leading to January, driven by an expansion in the services sector.

However, ONS Director of Economic Statistics Liz McKeown noted that overall growth remains weak, attributing January’s downturn to a slowdown in manufacturing, oil and gas extraction, and construction.

Meanwhile, the retail sector saw gains, particularly in food sales, as consumers opted to eat and drink at home more frequently.

Chancellor Reeves attributed the sluggish economy to global challenges, stating that Britain is “feeling the consequences” of a shifting economic landscape.

She emphasized Labor’s commitment to accelerating reforms, boosting public services, and revitalizing economic growth. She also highlighted plans for the largest sustained increase in defense spending since the Cold War and measures to overcome obstacles to infrastructure development.

However, the opposition was quick to criticize Labor’s handling of the economy. The Conservatives labeled the government a “growth killer,” pointing to Labor’s upcoming national insurance hike as a deterrent to business confidence.

Shadow Chancellor Mel Stride argued that Labor had inherited the fastest-growing economy in the G7 but has since overseen a collapse in business sentiment. He urged Reeves to rethink her fiscal approach ahead of her emergency budget, warning that continued mismanagement would harm working people.

Liberal Democrat Deputy Leader Daisy Cooper also took aim at Labor’s economic policies, calling the party’s budget “wretched” and arguing that the spring statement must provide a much-needed economic stimulus. She urged the Chancellor to acknowledge the shortcomings of her budget and introduce a new strategy to support small businesses.

Labor has prioritized economic growth since winning last year’s election, but progress has been slow amid declining consumer confidence and rising inflation.

Paul Dales, Chief UK Economist at Capital Economics, warned that economic momentum is unlikely to improve significantly, given the prospect of higher taxes in April and worsening global conditions.

Government ministers acknowledged the challenges ahead, with Care Minister Karin Smyth conceding that fixing the economy will take time. She pointed to Labor’s policy measures, such as changes to planning laws and NHS reforms, as key steps toward fostering long-term growth.

While an unexpected uptick in GDP at the end of 2024 had temporarily eased pressure on Reeves, the January contraction underscores the difficulties in achieving Labor’s economic objectives.

With the Chancellor’s fiscal space tightening due to stagnant growth, inflation, and rising borrowing costs, her 26 March statement is expected to include spending cuts and benefit reductions to keep the government on track with its self-imposed financial targets.