The UK economy unexpectedly shrank at the start of 2025, piling fresh pressure on Prime Minister Keir Starmer’s government over the lack of momentum since Labour returned to power last summer.
Gross domestic product fell 0.1% in a storm-hit January, driven by declines in manufacturing and construction, the Office for National Statistics said Friday. Economists had expected a 0.1% increase. It means output is still barely larger than when Labour won a landslide election victory in July.
Chancellor of the Exchequer Rachel Reeves pointed to the global turbulent backdrop for the weakness, warning that “the world has changed and across the globe we are feeling the consequences.”
Reeves is under pressure to start delivering on her promise to boost growth after a dismal run of economic indicators under Labour. She is preparing to announce what’s expected to be a sobering economic update on March 26, when official growth forecasts may be trimmed.
Friday’s figures mean the economy has contracted in four out of the seven months since Labour took office. GDP is only 0.3% higher than it was in June.
The pound extended losses, dropping as much as 0.2% to $1.2924 as traders incrementally added to expectations for more interest-rate cuts. Traders now see 57 basis points of reductions this year.
The weakness in January was partly driven by the UK being hit by the strongest storm for 10 years, suggesting that some sectors could rebound in February.
While economists are predicting a return to steady growth this year, risks to the outlook are mounting with Donald Trump’s escalating trade war sending stocks crashing and triggering fears of a global downturn. The hope is that Britain’s plans for big spending on infrastructure will underpin growth.
“Following the lackluster performance in the second half of 2024, growth remains fragile due to global and domestic uncertainty,” said Hailey Low, economist at the National Institute of Economic and Social Research. “It is crucial that the upcoming Spring Statement provides stability rather than adding to domestic uncertainty.”
What Bloomberg Economics Says…
“The surprise drop in January’s GDP still leaves the UK economy on course for a modest rebound in the first quarter after a sharp slowdown in the second half of 2024. Our view is growth will strengthen a little over the course of 2025. If data continues to disappoint, though, it will be hard for the Bank of England to stick with its gradual approach to policy easing. We still think the risk is for the central bank cutting rates faster than we’re expecting.”
—Read Ana Andrade and Dan Hanson’s REACT on the Terminal
Labour has unveiled a raft of policies to help it meet its promise of boosting growth, including unblocking building projects and green-lighting controversial developments. However, growth was patchy in the second half of last year and sentiment indicators nosedived after a tax-heavy budget in October.
The ONS said that output fell in eight of the 13 manufacturing sectors in January, with the production of metals and pharmaceuticals experiencing the largest declines. Anecdotal evidence points to construction being hit by storms, rain and snow during the month, it said. Oil and gas production also declined.
The falls were partly offset by 0.1% growth in services, the largest part of the UK economy. Retailers recorded a strong January thanks to people eating more frequently at home, according to the ONS.
The BOE expects the economy to continue expanding at a tepid pace, predicting a 0.7% expansion in 2025 after last year’s 0.9% rise. Facing an uncertain outlook, BOE rate-setters are expected to leave interest rates on hold next Thursday and warn markets of only gradual cuts.
“We doubt the bad news on GDP will be enough to convince the Bank of England to cut interest rates at its meeting next week,” said Thomas Pugh, economist at RSM UK. “Smooth out the month-to-month volatility and the economy is picking up some momentum, which should allay fears about the UK slipping back into recession.”
Officials are balancing the need to support a stagnant economy against signs of stubborn inflationary pressures and heightened uncertainty. They have flagged the threat of tariffs and the impact of Labour’s increase in employer payroll taxes on the jobs market and prices.
This story was originally featured on Fortune.com
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