The UK’s gross domestic product (GDP) unexpectedly contracted by 0.1% in January 2025, following a 0.4% growth in December 2024, according to the Office for National Statistics (ONS).
The production sector experienced a significant decline of 0.9%, primarily driven by a 1.1% drop in manufacturing output. Notably, the manufacture of basic metals and metal products decreased by 3.3%, and the pharmaceuticals sector saw a 3.1% reduction.
The services sector showed marginal growth of 0.1%. While retail trade grew by 1.7%, there were declines in accommodation and food services, which fell by 2.4%.
Construction output decreased by 0.2%, marking the second consecutive monthly decline. The fall was mainly due to a 0.7% reduction in new work, although repair and maintenance activities saw a slight increase of 0.4%.
This contraction poses challenges for Chancellor Rachel Reeves as she prepares for the upcoming Spring Statement on 26 March. The unexpected downturn may pressure the government to reassess fiscal policies and spending plans to stimulate growth.
George Lagarias, Chief Economist at Forvis Mazars commented: “Headwinds may be blowing harder, but that does not mean we should altogether ignore the tailwinds.
“It should be no surprise that British growth is decelerating, amid a global market correction, stubborn prices, weak external demand and peak policy uncertainty. Manufacturing is slowing down fast and job losses in the sector are the steepest in nearly five years. Consumers and businesses are reticent to make big capital spending decisions, as they fear the worsening global economic landscape.
“However, we feel that conditions may improve. Trade wars will probably eventually level off. Europe, meanwhile, Britain’s biggest trade partner, is eying improved growth conditions as Germany sheds its fiscal restraints. Deregulation could help businesses and increase credit.”
Financial markets reacted to the GDP figures, with the pound sterling weakening slightly against the US dollar, trading at US$1.2929, down 0.19% from the previous day. Additionally, Morgan Stanley has revised its 2025 GDP growth forecast for the UK from 1.3% to 0.9%, citing a slowdown in the economy and signs of labour market weakening.
Despite the January contraction, some analysts remain cautiously optimistic. The Treasury’s planned increase in day-to-day spending this year is expected to support economic activity. However, the Office for Budget Responsibility may lower its growth forecasts, adding pressure on the Chancellor’s fiscal strategies.
The Bank of England is anticipated to maintain interest rates at 4.5% in its upcoming meeting on March 20, balancing concerns over inflation and economic stability.
