The UK economy faced an unexpected contraction of 0.1% in January 2025, reflecting a challenging start to the year. This downturn is attributed to a significant decline in manufacturing output, which fell by 1.1%. Although the services sector showed a marginal increase of 0.1%, it was insufficient to counterbalance the downturn in the industrial sector. The latest data from the Office for National Statistics highlights these economic challenges, with the services sector unable to sustain the growth witnessed in December.
The contraction in January has dealt a blow to both the government's economic strategy and Rachel Reeves, who is under pressure to manage budget rules effectively. This economic decline has raised concerns about the country's financial stability and its impact on future budgetary decisions. Despite December's expansion of 0.4%, which contributed to a minor 0.1% rise in the last quarter of 2024, the economy's fragility persists.
Forecasts for the first quarter of 2025 vary, with the National Institute of Economic and Social Research (Niesr) predicting a growth of 0.4%. Conversely, the Bank of England offers a more conservative estimate, suggesting growth will be limited to only 0.1%. These differing projections underscore the ongoing uncertainty facing the UK economy.
The slight growth in GDP by 0.2% in the three months leading up to January 2025 provides some room for cautious optimism. However, this growth remains overshadowed by global and domestic uncertainties that continue to challenge economic stability.
"The UK economy starts the year on the back foot as global uncertainty casts a shadow on the outlook." – Yael Selfin, the chief economist at KPMG UK
Economists are now looking toward the upcoming spring statement, scheduled for March 26, as a potential source of stability. The statement is expected to introduce measures that will address domestic concerns without exacerbating existing uncertainties.
“It is crucial that the upcoming spring statement provides stability rather than adding to domestic uncertainty.” – Hailey Low, an economist at Niesr
Rachel Reeves, in response to the current economic climate, emphasized the need for decisive action to protect and reform essential services while stimulating growth.
“The world has changed and across the globe we are feeling the consequences. That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our plan for change.” – Rachel Reeves
The UK's economic performance at the start of 2025 highlights ongoing challenges that require strategic responses from policymakers. The effectiveness of these strategies will be closely watched as new data unfolds.