Muhamad Yehia
The British economy shrank in the first month of 2025 compared with December, driven by a decline in production.
The monthly British GDP unexpectedly fell by 0.1% in January, following growth of 0.4% in December 2024, according to an estimate from the UK statistics office (ONS).
The underperforming economy increases pressure on UK Chancellor Rachel Reeves, in charge of the economy, ahead of her Spring Statement in two weeks.
The Chancellor is expected to announce government spending cuts, which, coupled with the latest reports on the declining number of jobs in the UK, draw a gloomy picture of the economic outlook.
“Despite a surprise fall in January’s economic output, higher government spending should lead to reasonable growth through 2025. Whether that’s enough to avert tough decisions for the Treasury, we’re not so sure,” ING’s market economist, James Smith, said
In January, the major drag on output appeared to be the production sector, which fell by 0.9%. Within this category, manufacturing shrank by 1.1%.
Manufacturing underperformed due to a drop in the creation of basic metals and metal products, but a drop in pharmaceutical products, as well as mining and quarrying, also contributed to the shrinking of the sector.
Construction also declined slightly by 0.2% but services saw minor growth of 0.1%.
Services also drove growth over the three months to January, when real GDP was estimated to have grown by 0.2%, compared with the three months to October 2024.
Year-on-year, GDP is estimated to grow 1% in January 2025. The quarterly GDP growth compared to the same period last year came in at 1.2%
Muted market reaction followed the disappointing data
“The market reaction was muted, with shallow pullbacks in both sterling and pre-open FTSE 100,” Senior Market Analyst at Trade Nation, David Morrison, said.
“The latter is firmer this morning, taking its cue from an overnight rally across US stock index futures. The British pound is lower against the US dollar. But this represents some mild profit-taking following sterling’s sharp rally so far this month given overall dollar weakness,” he added
“President Trump’s tariff strategy has sown confusion and uncertainty across financial markets. Unfortunately, this situation looks set to continue until the US president achieves his aims or comes to some sort of accommodation with his trading partners.”
The trade disputes stirred by the US are also a looming threat to the UK economy. The country exported £60.4bn (€72bn) worth of goods (15.3% of all goods exports) to the US in 2023, according to the ONS
The weak output and resurging inflation will raise further questions ahead of the Bank of England’s (BoE) next meeting. The central bank’s base rate sits at 4.5%, following three rate cuts in August and November last year and in February this year.
The next Bank of England interest rate decision is due on 20 March.