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The UK economy highlighted the challenges facing Prime Minister Rachel Reeves, who was unexpectedly signed in January and prepare to offer a high stakes spring statement this month.
The National Bureau of Statistics' monthly GDP figures on Friday were below both the 0.1% growth forecast by economists voted by Reuters and the 0.4% in December. The decline was driven primarily by weaknesses in the production sector.
Reeves is preparing to curb public spending in a spring statement on March 26 after the fall of growth and rising government borrowing costs sparked fear that she would break fiscal rules.
After the UK economy rebounded from the technological recession in early 2024, growth since May has largely stalled.
Labour lawmakers and some cabinet ministers have expressed concern that Reeves plans to reduce politically damaging cuts to ease pressure on public finances, including cutting the welfare budget.
“That's the toughest thing we had to do,” acknowledged the prime minister's allies. However, Reeves rewrites the financial rules to allow more borrowing, eliminating her from forcing her to make what she calls “a tough choice.”
Shadow Prime Minister Mel Stride urged Reeves to turn his March 26th statement into an “emergency budget.”
The Budget Responsibility Bureau forecasts economic growth in 2025 at 2% in October. It's twice the 1% predicted by economists voted by Reuters. Watchdog will release a new forecast along with the spring statement.
Suren Till, director of economics at the chartered Institute of Accountants, said Reeves' spring statement was “more problematic” as the January GDP contraction increased the likelihood that OBR would downgrade its forecasts and “more undermined the prime minister's spending plans.”
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The pound weakened slightly after data release on Friday, falling 0.1% against the dollar in the morning, trading at $1.293. Guilt has been stable, with a 10-year yield of 4.70%, up just 0.01 percentage points.
The figures not only add to the economic tensions facing Britain, Donald Trump's escalating trade war, but also provide a higher defensive spending prospects as the US president disrupts the Western Security Alliance.
“The world is changing and we feel the results all over the world,” Reeves said in response to numbers Friday.
As a result, she said: “It has begun the biggest sustained increase in defence spending since the Cold War, and is taking on blockers to fundamentally rebuild the British state and deliver it for workers and their families, and rebuild the UK.”
Labour won the general election last July, promising to start growing, but Reeves faced criticism of the October budget, which has given businesses the brunt of £400 billion in tax cuts.
Companies are warning about job cuts as a result of measures that will take effect from April.
Consultant Capital Economics economist Paul Dales said the January decline in production “emphasised the weakness of the economy before business taxes were felt and an uncertain global background.”
The Bank of England is expected to hold 4.5% at next week's meeting amid signs of inflation rebound. Last month, the central bank reduced its first quarter economic growth forecast to 0.1% for the first quarter of 2025 from the expected 0.4% in November.
Despite the January shrinking, Thiru said interest rate cuts by BOE next week were “impossible” as he would likely assess the impact of an increase in employer's national insurance contributions from the budget.
Friday's data strengthened expectations that there will be at least two quarter interest rate cuts from the BOE this year, according to levels implied by the swap market.
According to ONS data on Friday, the manufacturing sector contracted 1.1% in January, construction fell 0.2% and services rose 0.1%.
Liz McKeown, director of ONS Economic Statistics, said the UK economy is “weak growth.”
But the service continues to grow in January, she said, “It leads to a strong month for retail, especially grocery stores, as people eat and drink more at home.”
The ONS said the release of trade data, which was normally released along with GDP figures, was delayed due to errors.
