The UK economy unexpectedly shrank by 0.1% in January 2025, according to the Office for National Statistics (ONS), casting a shadow over Chancellor Rachel Reeves’ upcoming spring statement. This contraction follows 0.4% growth in December and falls short of analyst predictions of 0.1% growth.
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The disappointing figures surprised City economists, who had anticipated continued growth. The decline highlights the fragility of the UK economy amidst global and domestic uncertainties. Growth in the services sector, while positive at 0.1%, was insufficient to offset declines in industrial production and construction.
Sector Performance Breakdown Reveals Underlying Weakness
A closer examination of sector-specific data reveals the underlying weakness driving the overall contraction. While the services sector managed marginal growth of 0.1% in January, this followed a stronger 0.4% expansion in December. More concerning were the declines in production and construction. Industrial production fell by 0.9%, reversing the 0.5% growth seen in December. Construction output also continued its downward trend, contracting by 0.2% for the second consecutive month.
Liz McKeown, ONS director of economic statistics, attributed the January contraction to a significant slowdown in manufacturing, coupled with weak performance in oil and gas extraction and construction. Despite the January setback, GDP grew by an estimated 0.2% in the three months to January compared to the previous quarter, primarily due to growth in the services sector.
Chancellor Faces Pressure to Address Economic Fragility
In response to the latest figures, Chancellor Reeves acknowledged the global economic challenges and reiterated the government’s commitment to protecting the country, reforming public services, and stimulating economic growth. She highlighted the planned increase in defense spending and efforts to address obstacles to construction and development. However, the January contraction adds pressure on the Chancellor to deliver a compelling spring statement on March 26th that addresses the economy’s underlying vulnerabilities and provides a roadmap for sustainable growth.
Hailey Low, an associate economist at the National Institute of Economic and Social Research, emphasized the need for stability and urged the Chancellor to use the spring statement to provide reassurance to businesses and consumers. The weak start to 2025 underscores the fragility of the UK economy and the challenges facing policymakers in navigating a complex and uncertain economic landscape. The spring statement will be a crucial opportunity for the Chancellor to outline a clear and credible plan for fostering sustainable economic growth and restoring confidence in the UK economy.
