The UK economy shrank unexpectedly in January, dealing a setback to the government just weeks before the Spring Statement. The 0.1% contraction, largely driven by a slowdown in manufacturing, was weaker than economists had predicted and highlights ongoing challenges in the country’s economic recovery.
The government, which has made economic growth a top priority, now faces renewed pressure as Chancellor Rachel Reeves prepares to outline her tax and spending plans. Reeves acknowledged the disappointing figures, stating that the government must go “further and faster” to stimulate the economy. Meanwhile, opposition Conservatives accused Labour of being a “growth killer.”
Growth Outlook Weakens
Economists had forecast a modest 0.1% expansion in January following 0.4% growth in December. Although monthly GDP figures can be volatile, the Office for National Statistics (ONS) reported that the economy grew by just 0.2% over the three months to January, reflecting broader stagnation.
ONS Director of Economic Statistics Liz McKeown noted that while retail sales—particularly food shopping—helped offset declines in other sectors, the overall economic picture remained weak. The construction industry, as well as oil and gas extraction, struggled in January, further dampening growth prospects.
With tax increases set to take effect in April, concerns are mounting that economic sluggishness could persist. Businesses warn that higher National Insurance contributions, rising minimum wages, and reduced business rates relief will strain employers, limiting their ability to raise wages and create jobs.
Global and Domestic Pressures
The UK economy is also grappling with external uncertainties, including the impact of tariffs imposed by U.S. President Donald Trump. At the same time, the government faces mounting demands to increase defence spending, adding further pressure on public finances.
Reeves, responding to the GDP figures, acknowledged the challenging global economic landscape, stating that the government was committed to launching “the biggest sustained increase in defence spending since the Cold War.” However, with the chancellor bound by self-imposed fiscal rules, government spending may need to be tightened to avoid breaching budget targets.
Last month, the Bank of England halved its growth forecast for 2024, and the independent Office for Budget Responsibility is expected to downgrade its projections at the Spring Statement. As a result, expectations are growing that the government will announce significant cuts to welfare and other areas of public spending.
Political and Business Reactions
The Conservative Party seized on the weak economic data to criticize the Labour government, with Shadow Chancellor Mel Stride accusing it of “crushing business with extreme employment legislation.” Liberal Democrat Treasury spokeswoman Daisy Cooper added that Reeves’ economic plan leaves the economy “on life support,” arguing that tax changes will disproportionately hurt small businesses.
Business owners echoed these concerns. John Dipre, who runs Ashstead Park Garden Centre in Surrey, said higher taxes and wage costs would “hit us hard” and make it difficult for small businesses to thrive.
Economic analysts suggest the government will need to make difficult choices in the coming months. Yael Selfin, chief economist at KPMG UK, predicted that Reeves will have to “tighten purse strings” in the Spring Statement, with spending cuts likely in certain departments. Meanwhile, Anna Leach of the Institute of Directors warned that while a single month of weak GDP data is not necessarily alarming, the broader trend of stagnation leaves the economy “vulnerable” to further shocks.
With uncertainty over trade, taxation, and government spending set to dominate discussions in the coming weeks, all eyes will be on Reeves’ Spring Statement to see how the government responds to the growing economic challenges.
