The UK financial system stalled at first of the yr as households reduce on discretionary spending, with eating places and meals companies experiencing a pointy decline in exercise.
New figures from the Workplace for Nationwide Statistics (ONS) present that gross home product (GDP) recorded zero development in January, falling in need of economists’ expectations and marking a slowdown from the modest 0.1% development recorded in December. Analysts had forecast that output would develop by round 0.2% over the month.
The disappointing efficiency highlights the delicate state of the UK financial system even earlier than the most recent geopolitical shock from the escalating US-Israeli battle with Iran, which economists warn may additional dampen development by pushing vitality costs greater and fuelling inflation.
The ONS mentioned the general financial image remained “subdued”, with consumer-facing sectors significantly weak. Throughout the dominant companies sector, which accounts for round 80% of UK financial exercise, there was a notable 2.7% drop in food and drinks service exercise as households curtailed spending on consuming out.
This contraction in hospitality means that the stress on family funds continues to weigh closely on client behaviour. Eating places and pubs are sometimes among the many first sectors to really feel the impression when shoppers start tightening their budgets.
Extra broadly, the companies sector confirmed no development general through the month, underscoring the cautious spending surroundings dealing with companies.
Different components of the financial system additionally delivered blended outcomes. Industrial manufacturing slipped by 0.1% throughout January, whereas building exercise supplied one of many few vivid spots, increasing by 0.2% over the month.
The flat studying follows a interval of slowing financial momentum through the second half of 2025, when uncertainty over tax adjustments, rising unemployment and lingering cost-of-living pressures led many shoppers to cut back spending.
Though the month-to-month GDP determine confirmed stagnation, the three-month measure of financial exercise, which is usually much less risky, indicated modest development. Within the three months to January, the UK financial system expanded by 0.2%, barely stronger than the 0.1% recorded within the earlier three-month interval.
Nonetheless, economists say the underlying image stays weak, significantly as world developments threaten to worsen inflation and sluggish financial exercise additional.
The most recent knowledge was compiled earlier than the outbreak of hostilities involving america, Israel and Iran, which has despatched world vitality costs sharply greater. Oil costs have surged and wholesale fuel markets have develop into more and more risky, elevating considerations a few renewed cost-of-living squeeze for British households.
Prime Minister Sir Keir Starmer warned earlier this week that the longer the Center East battle continues, the extra seemingly it’s to have a tangible impression on the UK financial system.
Increased vitality costs are already feeding via to petrol and diesel prices, whereas households lined by Ofgem’s vitality worth cap will stay shielded from speedy will increase till the following adjustment interval in July.
Nonetheless, economists warn that sustained vitality worth rises may rapidly push inflation greater once more. Earlier than the battle erupted, inflation had been anticipated to fall to the Financial institution of England’s 2% goal by the spring. A renewed surge in vitality prices may derail that trajectory.
The shift within the inflation outlook has already affected monetary markets. Expectations that the Financial institution of England would start reducing rates of interest as early as March have largely evaporated, with economists now broadly anticipating that policymakers will maintain charges regular after they meet subsequent week.
This transformation in rate of interest expectations has had a direct impression on the mortgage market. A whole bunch of mortgage offers have been withdrawn by lenders in current days, whereas common mortgage charges have climbed again to ranges not seen since final spring.
If the geopolitical tensions persist, analysts say greater borrowing prices and weaker client confidence may undermine Labour’s central financial precedence of accelerating development.
Chancellor Rachel Reeves acknowledged the challenges dealing with the financial system, saying the federal government remained dedicated to its long-term financial technique.
“Our financial plan is the fitting one, however I do know there’s extra to do,” she mentioned.
“In an unsure world, we’re constructing a stronger and safer financial system by reducing the price of dwelling, lowering nationwide debt and creating the circumstances for development so that every one components of the nation can prosper.”
Opposition figures have been fast to criticise the federal government’s financial efficiency. Shadow chancellor Sir Mel Stride mentioned Labour had left the financial system uncovered to exterior shocks.
“Labour’s financial mismanagement has left the UK susceptible to the potential penalties of the Iran battle,” he mentioned.
“They have to now take pressing motion, together with reducing gas responsibility, supporting North Sea oil and fuel manufacturing and placing ahead a reputable plan to cut back the deficit and convey down the advantages invoice.”
Wanting forward, economists consider development is prone to stay subdued all through a lot of the yr.
The Workplace for Funds Duty lately downgraded its forecast for UK financial development in 2026 to 1.1%, down from its earlier estimate of 1.4%.
Yael Selfin, chief economist at KPMG UK, mentioned the most recent GDP figures recommended the financial system had begun the yr on weak footing and will wrestle to regain momentum.
“The UK financial system began the yr on the again foot and exercise is predicted to weaken additional amid sharply rising vitality costs,” she mentioned.
Selfin added that authorities borrowing prices have elevated in current weeks as monetary markets reassess the outlook for rates of interest. Increased borrowing prices may act as a headwind for companies and households alike.
“With expectations for weaker development mixed with rising prices, companies are prone to cut back funding plans,” she mentioned.
For policymakers, the problem now lies in navigating a fragile home financial system whereas responding to exterior shocks that threaten to push inflation greater and delay any aid from elevated rates of interest.
