The UK economy unexpectedly contracted by 0.1% in January, delivering a blow to the government’s plans to boost economic growth ahead of the upcoming Spring Statement.
The decline, driven largely by a slump in the manufacturing sector, has raised concerns about the country’s economic recovery.
Economists had predicted a modest 0.1% growth for January, following a stronger-than-expected 0.4% expansion in December.
However, the latest data from the Office for National Statistics (ONS) paints a different picture, with weak performances in construction and oil and gas extraction contributing to the downturn.
Liz McKeown, Director of Economic Statistics at the ONS, highlighted that the drop was partly offset by a rise in retail sales, especially in food and drink, as more people chose to dine at home.
Despite this, the broader trend indicates sluggish growth, with the economy expanding by just 0.2% over the past three months.
The unexpected contraction comes at a challenging time for Chancellor Rachel Reeves, who has made boosting economic growth a top priority.
With tax hikes set to take effect in April and rising business costs due to higher National Insurance contributions and an increased minimum wage, businesses are warning of further pressure on the economy.
The government is also facing external challenges, including new tariffs imposed by the US and mounting demands to increase defence spending.
In response to the figures, Reeves admitted that the government must go “further and faster” to support the economy. However, the opposition accused the Labour government of stifling growth.
Conservative shadow chancellor Mel Stride labelled the current administration a “growth killer” for raising taxes and introducing strict employment legislation.
Meanwhile, Liberal Democrat Treasury spokeswoman Daisy Cooper argued that Reeves’s strategy has left the economy “on life support,” warning that small businesses will bear the brunt of upcoming tax changes.
John Dipre, owner of Ashstead Park Garden Centre in Surrey, expressed his concerns about rising National Insurance contributions, reduced business rates relief, and higher wages. He said these changes would “hit us hard” and called for more support for small businesses to drive growth.
With the Bank of England already halving its growth forecast for 2025, and the Office for Budget Responsibility expected to downgrade its predictions further, the government is under pressure to find solutions.
Reports suggest significant cuts to the welfare budget could be announced next week as part of efforts to meet spending targets.
As the Spring Statement approaches, all eyes will be on Reeves to see how she navigates these economic challenges and restores confidence in the UK’s growth strategy.
