The UK economy contracted unexpectedly in January, dealing a setback to the government as it prepares for the Spring Statement later this month. According to the Office for National Statistics (ONS), gross domestic product (GDP) shrank by 0.1%, falling short of economists’ predictions of modest growth.
The decline was largely driven by a slump in the manufacturing sector, alongside weaker construction activity and oil and gas extraction. While retail sales, particularly in food stores, provided some support, the overall economic outlook remains fragile.
Liz McKeown, ONS director of economic statistics, noted that despite some areas of growth, the broader trend was one of economic weakness. “The economy is estimated to have grown by 0.2% over the three months to January, but January’s decline highlights the ongoing challenges,” she said.
The unexpected contraction puts further strain on Chancellor Rachel Reeves, who has made economic growth a central focus. Reeves acknowledged the need for urgent action, stating that the government must go “further and faster” to improve the economy. However, the Conservative opposition has accused Labour of stifling growth through tax hikes and regulatory burdens.
Business Concerns and Political Reactions
With tax increases set to take effect in April, concerns are mounting that growth will remain sluggish in the months ahead. Businesses warn that higher National Insurance contributions, an increased minimum wage, and reduced business rates relief could limit their ability to expand, hire workers, and raise wages.
John Dipre, owner of Ashstead Park garden centre in Surrey, expressed frustration over the mounting financial pressures. “It’s going to be very tough. If you really want to support growth, you need to be supporting small businesses—that’s what England’s all about,” he said.
Meanwhile, external factors, including trade uncertainty surrounding US President Donald Trump’s tariffs, are adding further challenges for UK businesses. Car manufacturers, in particular, are struggling with shifting regulations and fluctuating policies on electric vehicle adoption.
Conservative shadow chancellor Mel Stride blamed Labour’s economic policies for the downturn, calling the government a “growth killer.” Liberal Democrat Treasury spokeswoman Daisy Cooper echoed similar concerns, warning that Reeves’s tax plans could “hammer small businesses” and leave the economy “on life support.”
Fiscal Constraints and Spending Cuts
The latest figures come as the government faces mounting fiscal pressures. The Bank of England recently halved its UK growth forecast for the year, and the Office for Budget Responsibility is expected to downgrade its own predictions in the Spring Statement.
In response, the government is expected to unveil further spending cuts, including reductions in welfare funding. Reeves has already redirected UK aid to bolster defence spending, signaling that other departments could also face tighter budgets.
Yael Selfin, chief economist at KPMG UK, suggested that Reeves is likely to “tighten the purse strings” in the upcoming statement. “The recent cuts to UK aid to fund defence spending are a preview of what’s to come. Some departments will see their budgets squeezed,” she said.
Anna Leach, chief economist at the Institute of Directors, emphasized that while a single month’s GDP decline may not be cause for alarm, the broader economic picture remains weak. “The UK economy is quite vulnerable right now, and this certainly won’t help in the lead-up to the Spring Statement,” she said.
With economic uncertainty mounting and political pressure intensifying, all eyes will be on Chancellor Reeves as she unveils the government’s economic plans in the coming weeks.
