In a surprising turn of events, the UK economic growth experienced an unexpected contraction in January, shrinking by 0.1%. This development has cast a shadow over the government’s economic strategy ahead of the highly anticipated Spring Statement later this month. The decline was primarily driven by a downturn in the manufacturing sector, which has raised questions about the country’s ability to sustain long-term growth.
Chancellor Rachel Reeves faces mounting pressure as she navigates self-imposed fiscal rules on taxation and public spending. While economists had predicted modest growth of 0.1% following December’s 0.4% expansion, the reality painted a more concerning picture.
According to Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), sectors such as construction and oil and gas extraction struggled significantly during the month. However, retail—particularly food sales—saw some improvement, likely due to consumers opting to eat and drink at home more frequently.
Despite these mixed signals, the broader outlook remains bleak. A bar chart illustrating monthly GDP figures from January 2023 to January 2025 highlights erratic fluctuations, with recent months showing minimal progress or outright declines. For instance, after slight growth in December 2024 (+0.4%), the economy faltered again in January 2025 (-0.1%).
Adding to the challenges is the impending rise in taxes scheduled for April. Businesses warn that increased National Insurance contributions, higher minimum wages, and reduced business rates relief could stifle economic momentum. Employers anticipate having less disposable income to allocate towards salary increases or job creation, further hampering recovery efforts.
Global factors are also contributing to uncertainty. US President Donald Trump’s imposition of tariffs has created additional hurdles for exporters, while domestic calls for increased defence spending add another layer of complexity. In response, Reeves acknowledged the changing global landscape and announced plans for the largest sustained increase in defence expenditure since the Cold War. Yet, these commitments come at a time when public finances are under intense scrutiny.
Last month, the Bank of England revised its growth forecast downward for the year, and similar adjustments are expected from the Office for Budget Responsibility (OBR) during the upcoming Spring Statement. Such revisions have fuelled speculation that government spending may need to be curtailed to align with Reeves’ fiscal guidelines. Significant cuts to welfare budgets are reportedly on the agenda as part of broader cost-saving measures.
Critics have been quick to voice their concerns. Conservative shadow chancellor Mel Stride accused the Labour government of being a “growth killer,” citing recent tax hikes and stringent employment regulations. Meanwhile, Daisy Cooper of the Liberal Democrats described Reeves’s growth strategy as leaving the economy “on life support.”
Small business owners like John Dipre, who runs Ashstead Park garden centre near Epsom, Surrey, echo these sentiments. He expressed worries about how upcoming changes to National Insurance, rate assistance, and minimum wage requirements will impact his operations.
Experts agree that the path forward is fraught with difficulties. Yael Selfin, chief economist at KPMG UK, suggested that forecasts of sluggish growth would likely compel Reeves to adopt a more conservative approach in her Spring Statement.
Anna Leach, chief economist at the Institute of Directors, noted that although single-month GDP variations aren’t always indicative, the overall weakness of the economy makes it particularly vulnerable. She highlighted specific vulnerabilities within the automotive industry, exacerbated by trade uncertainties stemming from Trump’s tariffs and shifting targets for electric vehicle adoption.
As the nation braces for potential austerity measures and continued economic turbulence, all eyes are on the Spring Statement. Will Chancellor Reeves manage to strike a balance between fiscal responsibility and fostering sustainable growth? Only time will tell, but the stakes couldn’t be higher for the UK economy.
