UK financial system shrinks unexpectedly in blow to Rachel Reeves

The UK financial system contracted by 0.1% in January, dealing a blow to Rachel Reeves earlier than the spring assertion later this month.

In a shock to Metropolis economists, who anticipated 0.1% development in January, the Workplace for Nationwide Statistics knowledge confirmed the providers sector did not offset a decline within the industrial sector and keep development from the earlier month.

Manufacturing output fell by 1.1% in January 2025, reversing a spurt of 0.7% in December final 12 months. Development was one other drag on the financial system after poor winter climate held again housebuilders.

Companies elevated by solely 0.1%, with falls in hospitality and humanities and leisure making the most important dent in development.

The ONS mentioned GDP was estimated to have grown by 0.2% within the three months to January 2025, in contrast with the three months to October 2024, because of the expansion within the providers sector.

Yael Selfin, the chief economist at KPMG UK, mentioned: “The UK financial system begins the 12 months on the again foot as world uncertainty casts a shadow on the outlook.”

Reeves blamed world financial uncertainty for the downturn, including {that a} plan to extend defence spending would give the financial system a carry.

She mentioned: “The world has modified and throughout the globe we’re feeling the implications. That’s why we’re going additional and sooner to guard our nation, reform our public providers and kickstart financial development to ship on our plan for change.

“And why we’re launching the most important sustained enhance in defence spending because the chilly conflict.”

The shadow chancellor, Mel Stride, mentioned: “It’s no shock that development is down once more, following close to no development within the final three months of 2024.”

Stride mentioned the finances final October had hit companies’ confidence. “After persistently speaking Britain down, elevating taxes to file highs and crushing enterprise with their excessive employment laws, this authorities is a development killer,” he mentioned.

Most enterprise surveys have indicated that corporations are placing a freeze on hiring staff and delaying investments to preserve funds. Authorities spending tasks have additionally confronted delays whereas ministers evaluate plans put ahead beneath the earlier Conservative authorities.

The chancellor is anticipated to announce deep cuts in authorities welfare spending on the spring assertion on 26 March to remain throughout the authorities’s finances guidelines. In December the financial system expanded by 0.4%, serving to the final quarter of the 12 months to register a 0.1% rise and keep away from two quarters of zero development.

The Financial institution of England’s rate-setting financial coverage committee is forecast to be unmoved by the newest figures when it meets subsequent week. Monetary markets count on rates of interest can be stored on maintain at 4.5%.

The Nationwide Institute of Financial and Social Analysis (Niesr) has forecast that the financial system will develop by 0.4% within the first quarter of 2025, a lot greater than the Financial institution, which has estimated development can be restricted to solely 0.1%.

After the lacklustre efficiency within the second half of 2024, development stays fragile due to world and home uncertainty.

Hailey Low, an economist at Niesr, mentioned: “It’s essential that the upcoming spring assertion supplies stability reasonably than including to home uncertainty. Frequent coverage U-turns threat undermining enterprise and investor confidence at a time when readability and consistency are most wanted.”