The latest official figures released on Friday revealed that the U.K. economy unexpectedly shrank by 0.1% month-on-month in January. The data, provided by Britain's Office for National Statistics (ONS), indicates that the primary cause of this contraction was a decline in the production sector. Economists surveyed by Reuters had anticipated a modest growth of 0.1% in the country's Gross Domestic Product (GDP).
Following the release of the GDP data at 7:35 a.m. in London, the British pound fell approximately 0.15% against the dollar, trading at $1.293. Meanwhile, the pound remained stable against the euro. In addition, long-term government borrowing costs, which had surged to multi-decade highs earlier this year, continued to rise. The yield on 20-year U.K. government bonds, known as gilts, increased by 2 basis points, while 30-year gilt yields rose by 4 basis points.
While services output showed a slight increase of 0.1% month-on-month in January, this represented a slowdown from the 0.4% increase recorded in December. In contrast, the production output experienced a significant decline of 0.9% after a 0.5% rise in the previous month. Additionally, construction output fell by another 0.2% in January, mirroring the decline from December.
Data from last month indicated that the U.K. economy had grown by 0.1% in the fourth quarter, surpassing expectations, while it had remained flat in the third quarter. The monthly GDP data has shown a mixed trend, featuring a 0.1% contraction in October, followed by a 0.1% expansion in November and a 0.4% month-on-month growth in December, primarily driven by advances in services and production.
This latest GDP release will be the final data print before the U.K. Treasury's Spring Statement on March 26, where Chancellor Rachel Reeves will provide an update on her plans for the British economy. The statement will coincide with economic forecasts from the Office for Budget Responsibility, the U.K.'s independent economic and fiscal forecaster, which will assess the potential effects of the government's tax and spending strategies.
Concerns have emerged regarding the Treasury's fiscal plans, introduced last fall, which are set to increase the tax burden on British businesses. Critics argue that these measures could adversely affect investment, jobs, and overall economic growth. However, Reeves has defended the tax increases, labeling them as a one-off necessity to enhance investment in public services.
In February, the Bank of England implemented its first interest rate cut of the year, suggesting further cuts may follow as it revised the U.K.'s growth forecast for 2025 downward from 1.5% to 0.75%. Market data indicates that the Bank of England is widely expected to maintain interest rates at 4.5% during its upcoming Monetary Policy Committee meeting next week. The central bank is grappling with the challenge of balancing the need for economic growth against the inflationary risks associated with U.S. President Donald Trump's trade tariffs.
The U.K. has not been directly targeted by Trump's tariffs thus far, but its exports of steel and aluminum to the U.S. will be subject to a blanket 25% import duty. Paul Dales, chief U.K. economist at Capital Economics, noted that the recent data underscores the fragility of the British economy before the implications of rising business taxes and geopolitical uncertainties fully materialize. He emphasized that much of the current weakness is merely a correction following December's unexpectedly strong 0.4% m/m GDP rise.
According to Dales, the underlying growth rate is likely just above zero. He added that while Trump's tariffs on steel and aluminum were only recently enacted, their effects could already be felt, particularly as evidenced by the 1.1% m/m decline in manufacturing output, partly driven by a 3.3% m/m drop in metals production—an outcome potentially linked to the anticipated tariffs.
During a parliamentary session on Wednesday, Britain's Prime Minister Keir Starmer expressed optimism that the U.K. could navigate Trump's protectionist trade policies. "I'm disappointed to see global tariffs in relation to steel and aluminum, but we will take a pragmatic approach," he stated. Starmer reassured that the government is actively negotiating an economic deal that would encompass tariffs if successful, while keeping all options open for future negotiations.
