The UK economy shrank by 0.1% in January, with a slowdown in manufacturing, construction, and oil and gas extraction among the key factors. This drop followed 0.4% growth in December, making the performance weaker than expected.
The figures are a setback for the government, which has prioritised economic growth. They also come ahead of the Spring Statement, where spending cuts are expected. The Office for National Statistics (ONS) noted that while the economy shrank slightly in January, it showed growth over the last three months.
Retail, particularly food sales, helped offset some of the decline as people ate at home more. Despite the monthly drop, the economy grew 0.2% in the three months leading up to January, according to the ONS.
2025 forecasts have been revised down to 0.9%, reflecting persistent cost pressures and global trade uncertainty.
“Inflation remains a key risk, with the Bank of England projecting it to rise to 3.7% by Q3 –nearly double its 2% target," Lale Akoner, global market analyst at eToro, said in an emailed statement.
"In response to slowing growth, the BoE cut rates to 4.5%, but further easing will depend on inflation data. This delicate balancing act highlights the policy challenges ahead," she added.
On the fiscal side, Akoner said Chancellor Rachel Reeves’ Spring Statement on 26 March will be closely watched. With borrowing costs rising, the government is expected to prioritise spending cuts while considering targeted tax adjustments, including potential changes to inheritance tax and ISAs.