UK monthly GDP data for January

The latest official figures released on Friday by the U.K.’s Office for National Statistics revealed an unexpected contraction of the country’s economy by 0.1% month-on-month in January. This decline was primarily attributed to a decrease in the production sector, contrary to economists’ expectations of a 0.1% growth in GDP.

Following the data release, the British pound experienced a slight dip of approximately 0.15% against the dollar, trading at $1.293, while remaining stable against the euro. Concurrently, long-term government borrowing costs, which had previously soared to multi-decade highs, saw an increase as well. The yield on 20-year U.K. government bonds, known as gilts, rose by 2 basis points, with 30-year gilt yields also up by 4 basis points.

Although services output saw a modest 0.1% increase month-on-month in January, it represented a slowdown from the 0.4% growth observed in December. Conversely, production output witnessed a notable 0.9% decline during the same period, following a 0.5% rise in the previous month. Construction output also dropped by 0.2% in January, mirroring the decrease seen in December.

Recent ONS data had shown a 0.1% growth in the U.K. economy during the fourth quarter of the previous year, surpassing expectations. The economy had remained stagnant in the third quarter. Subsequent monthly GDP figures displayed mixed results, with a 0.1% contraction in October, a 0.1% expansion in November, and a 0.4% month-on-month growth in December, fueled by increased activity in services and production.

The latest GDP release marks the final data publication before the upcoming “Spring Statement” by the U.K. Treasury on March 26. Chancellor Rachel Reeves is set to provide an update on the government’s economic plans, alongside economic forecasts from the Office for Budget Responsibility, the country’s independent economic and fiscal forecaster.

There have been concerns regarding the potential impact of the Treasury’s fiscal measures, including tax hikes on businesses, on investment, job creation, and economic growth. Despite criticism, Reeves defended the tax increases as necessary for enhancing investment in public services.

In response to economic challenges, the Bank of England initiated its first interest rate cut of the year in February and revised down the growth forecast for 2025 from 1.5% to 0.75%. Market expectations indicate that the central bank will maintain interest rates at 4.5% during its upcoming Monetary Policy Committee meeting.

The bank emphasized the importance of balancing growth stimulation with inflationary risks, particularly in light of U.S. President Donald Trump’s trade tariffs. While the U.K. has not been directly targeted, the imposition of tariffs on steel and aluminum could impact the country’s exports to the U.S.

Chief U.K. economist at Capital Economics, Paul Dales, highlighted the underlying weakness in the British economy, exacerbated by rising business taxes and geopolitical uncertainties. He noted that the recent manufacturing output decline could be linked to anticipated tariffs on metals implemented by the U.S.

Prime Minister Keir Starmer expressed optimism in parliament about navigating Trump’s protectionist trade policies, emphasizing ongoing negotiations for an economic deal that may include tariffs if successful. Despite global economic challenges, the U.K. remains focused on pursuing pragmatic solutions to safeguard its economic interests.