The UK economy will shrink in January with a new setback in the summer
The UK economy unexpectedly shrank in the beginning of 2025, putting new pressure on Prime Minister Kielstarme on the lack of momentum since Labour took power last summer.
The National Bureau of Statistics said Friday that GDP fell 0.1% in January, resulting from a decline in production and construction. Economists expected an increase of 0.1%. That means production is still barely larger than when Labour won a landslide election victory in July.
The Prime Minister of Exchequer Rachel Reeves pointed to the background of global turbulence for weaknesses, warning that “the world is changing and we are feeling consequences all over the world.”
Reeves is under pressure to begin offering her promise to boost her growth after a disastrous run of economic indicators under labor. She is preparing to release a calm economic update and what is expected on March 26, when official growth forecasts may be trimmed.
Friday’s figures mean the economy has signed four months of the seven months since Labor took office. GDP is only 0.3% higher than in June.
The pound has dropped from 0.2% to $1.2924 as traders gradually added to expectations for more interest cuts. Traders are watching a 57 basis points cut this year.
The weakness in January is driven in part by the UK’s strongest storm in a decade, suggesting that several sectors could bounce back in February.
Economists are projecting a return to steady growth this year, but the risk to the outlook is addressing Donald Trump’s escalating trade war, causing fears of a global recession. The hope is that UK plans for large-scale spending on infrastructure support growth.
“Following the shortage of performance in the second half of 2024, Haley Law, economist at the Institute for Economic and Social Studies, said: “It is important that the upcoming spring statements provide stability rather than increasing domestic uncertainty.”
What Bloomberg Economics says…
“The surprising decline in GDP in January leaves the UK economy on track due to a modest rebound in the first quarter after a sharp slowdown in late 2024. Our view is a little longer during 2025. We believe the risk of central bank reduction rates is faster than expected.”
– Read the reactions of Ana Andrade and Dan Hanson at the terminal
Labour has announced numerous policies to help meet its promises to boost growth, such as unblocking building projects and promoting controversial development of green light. However, growth was patchy in the second half of last year, with emotional indicators gaining attention after the tax budget in October.
ONS said production declined in eight of the 13 manufacturing sectors in January, with metals and drug production experiencing the biggest decline. Anecdotal evidence said it points to construction that was hit by storms, rain and snow during the month. Oil and gas production also declined.
The fall was partially offset by a 0.1% growth in services, the biggest part of the UK economy. According to ONS, retailers recorded a strong January in January thanks to people who eat more frequently at home.
BOE expects the economy to continue expanding at a softer pace, forecasting a 0.7% expansion in 2025 after an increase of 0.9% last year. Faced with uncertain outlook, BOE rate setters are expected to put interest on hold next Thursday, warning the market only of moderate cuts.
“We’ve seen a lot of effort and we’ve seen you in the world,” said Thomas Pugh, an economist at RSM UK. “The economy is gaining momentum by improving monthly volatility.
Authorities balance stubborn inflationary pressures with signs of increasing uncertainty with the need to support a stagnant economy. They flag the threat of tariffs and the impact of increased employer pay taxes on the employment market and price of employer pay taxes.
This story was originally introduced Fortune.com