The UK economy unexpectedly contracted by 0.1% month-on-month in January, according to official figures released on Friday. The Office for National Statistics attributed the decline primarily to a contraction in the production sector. Economists surveyed by Reuters had anticipated a 0.1% growth in GDP. Following the data release at 7:35 a.m. in London, the British pound fell approximately 0.15% against the dollar, trading at $1.293, while it remained flat against the euro. Long-term government borrowing costs also increased; yields on 20-year UK government bonds (gilts) rose by 2 basis points, and 30-year gilt yields increased by 4 basis points. Services output grew by 0.1% month-on-month in January, slowing down from the 0.4% increase in December. Production output dropped by 0.9% compared to the previous month, following a 0.5% rise in December. Monthly construction output fell by another 0.2% in January, after a similar decline in December. The UK economy grew by 0.1% in the fourth quarter, surpassing expectations, as per ONS data from last month. It stagnated in the third quarter. Monthly GDP data has been inconsistent since then, with a 0.1% contraction in October, a 0.1% expansion in November, and a 0.4% month-on-month expansion in December due to growth in services and production. This GDP release will be the final data point before the UK Treasury’s “Spring Statement” on March 26, where Chancellor Rachel Reeves will provide an update on her economic plans for Britain. The statement is accompanied by economic forecasts from the Office for Budget Responsibility, which evaluates the potential impact of the government’s tax and spending strategies. Concerns have arisen that the Treasury’s fiscal plans, announced last fall and set to increase the tax burden on British businesses, might negatively affect investment, jobs, and growth. Reeves has justified the tax increases, stating they are a one-time measure necessary to enhance public service investment. In February, the Bank of England made its first interest rate cut of the year, signaling further reductions as it halved the UK’s growth forecast for 2025 from 1.5% to 0.75%. Markets widely expect the Bank of England to maintain rates at 4.5% during its Monetary Policy Committee meeting next week, according to LSEG data released on Friday. The central bank will assess how to balance boosting growth with the inflationary risks posed by US President Donald Trump’s trade tariffs. Although the UK has not been specifically targeted so far, its steel and aluminum exports to the US will be subject to Trump’s blanket 25% import duties on these metals. In a note on Friday, Paul Dales, chief UK economist at Capital Economics, stated that the data highlighted the weakness in the British economy before the full effects of rising business taxes and geopolitical uncertainty were felt. “Most of the weakness is just payback from the surprisingly strong 0.4% m/m rise in GDP in December,” he said. “In other words, December’s figures made the economy look stronger than it really was and January’s make it look a bit weaker. The truth is probably that the underlying pace of growth is a little bit above zero.” He added that although US President Donald Trump’s blanket tariffs on steel and aluminum only came into effect this week, they could already have impacted the UK economy. “The 1.1% m/m fall in manufacturing output was partly due to a 3.3% m/m drop in metals output,” he explained. “It’s possibly related [to tariffs] as they have been anticipated for a while.” Speaking in parliament on Wednesday, UK Prime Minister Keir Starmer expressed hope that the UK could avoid 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 said. “We are negotiating an economic deal which covers and will include tariffs if we succeed, but we will keep all options on the table.” — news from CNBC
