The UK economy failed to expand in January, according to the latest figures from the ONS, which showed 0% GDP growth. The result was significantly worse than the 0.2% growth predicted by the City, as the country faces the dual pressures of domestic tax hikes and a global energy price shock. This stagnation is a major blow to the Labour party’s growth-focused agenda and has led to a cooling of investor confidence in the pound.
The services sector, which is the largest part of the UK economy, saw its output flatline as recruitment and hospitality industries contracted. Rising unemployment, now at a five-year high, suggests that many firms are struggling to maintain their workforce under the current tax regime. The accommodation and food services sector was particularly weak, falling by 2.7% as the cost-of-living crisis forced consumers to stay home.
On the global stage, the war in Iran has sent energy prices soaring, with crude oil consistently trading at over $100 a barrel. This inflationary pressure has made a near-term interest rate cut by the Bank of England look increasingly unlikely, as central bankers worry about the impact of high energy costs on long-term price stability. Analysts now expect that borrowing costs could remain elevated well into 2027.
Despite the monthly flatline, the economy did manage a 0.2% increase over the three months ending in January. However, this is seen as a fragile gain that could easily be erased if the Middle East conflict intensifies. Experts warn that a sustained period of high energy prices could squeeze disposable incomes so severely that a recession becomes a very real possibility later this year.
Chancellor Rachel Reeves defended the government’s trajectory, stating that they are building a more “secure economy” in a volatile world. She is expected to address the nation early next week to discuss the government’s plan for navigating the current crisis. As the government weighs an emergency energy support package, the focus remains on trying to revive “animal spirits” and restore business confidence.