UK GDP drops again ahead in blow for Rachel Reeves ahead of Budget | Personal Finance | Finance
Another blow for Rachel Reeves as UK GDP drops again ahead of Budget (Image: GETTY)
The UK economy contracted by 0.1% in January, figures from the Office of National Statistics (ONS) show. The drop was driven by a sharp fall in the production sector. Liz McKeown, ONS director of economic statistics, said the figures continued to show “weak growth”. She said: “The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.”
However, services “continued to grow” in January, led by a strong month for retail. Ms McKeown added: “Especially for food stores, as people ate and drank more at home.” January’s drop comes after two months of consecutive growth, with increases of 0.4% in December and 0.1% in November 2024. Most economists had forecast gross domestic product (GDP) to rise by 0.1% in the first month of the year.
READ MORE: Pensioners paying tax bills soar as numbers reach 7.13 million
The latest GDP figures have been released (Image: Getty)
Responding to the figures, Chancellor Rachel Reeves said: “The world has changed, and across the globe, we are feeling the consequences.
“That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our plan for change. And why we are launching the biggest sustained increase in defence spending since the Cold War, fundamentally reshaping the British state to deliver for working people and their families; and taking on the blockers to get Britain building again.”
Labour has made growing the economy its key priority since winning the election last year, but momentum has been slow amid falling consumer confidence and rising inflation.
Shadow chancellor Mel Stride said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024. After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation, this Government is a growth killer.
“Labour inherited the fastest growing economy in the G7, but since they arrived, business confidence has collapsed, and jobs are being lost. The Chancellor has 12 days until her emergency budget – she must think again, or hard-working people will continue to pay the price of a Labour Government without any business experience.”
Economists have described the “unnerving” GDP drop as a headache for the Chancellor and Bank of England interest rate-setters.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said: “These figures confirm an unnerving drop in economic output during January’s financial market turbulence, as a notably poor month for construction and manufacturers severely hindered overall activity.
“The UK’s economic performance may have been similarly downbeat in February, with any boost from consumer spending amid strong wage growth and lower interest rates weakened by the brake on business activity from this torrent of global uncertainty.”
M Thiru said the decline makes the upcoming Spring Statement “more problematic as it reinforces the prospect of a notable downgrade to the OBR’s growth forecasts, further undermining the Chancellor’s spending plans.”
He added: “Despite these disappointing figures, a rate cut next week looks unlikely as rate setters will probably want to assess the impact of April’s national insurance hike on inflation before sanctioning another policy loosening.”
Our community members are treated to special offers, promotions, and adverts from us and our partners. You can check out at any time. Read our Privacy Policy
The Confederation of British Industry (CBI) said a contraction in the UK economy in January showed the UK’s recovery is “fragile”.
Ben Jones, lead economist at the CBI, said: “After a surprisingly strong performance in December, some payback was always a possibility in January. But the mixed picture across different sectors in recent months suggests the recovery is still fragile.
“There are signs that the drop in business and consumer economic confidence following the autumn budget is bottoming out. But downside growth risks remain from the potential for a softer labour market and an uptick in inflation.”
Nicholas Hyett, investment manager at Wealth Club, said: “This is not the news the Chancellor would have wanted before this month’s Spring statement, with the economy shrinking when it had been expected to show modest growth.”
He noted that the slowdown in manufacturing output was “unsurprising” given the very uncertain outlook for exports with ever-changing tariffs. However, he said: “Services too has slowed dramatically, particularly in sectors like accommodation and food services which expect to be hit hard by higher living wage and employer national insurance contributions in April.
“That’s the really worrying thing about these numbers. Tariffs and increased labour costs were more worries than realities in January, the month covered by these numbers. Those worries will soon transform into realities. That leaves plenty of room for economic growth to deteriorate further, with far fewer catalysts to spark an economic recovery. We could be at the start of a long, slow slide into recession.”
Paul Nowak, Trade Union Congress (TUC) general secretary said the UK’s economic recovery “will be a bumpy ride” amid faltering growth figures on Friday.
He said: “The Government’s approach is taking us in the right direction. But there is still much more to do. Creating secure, decently paid jobs – the bedrock of a strong and resilient economy – will play a crucial role in reviving finances for families and the country.”
Mr Nowak added: “These figures show the need for public investment. Investment in public services and infrastructure will bring our economy back on track. Stronger growth is the best way to secure sustainable public finances.”
