The UK’s economic recovery hit a wall in January, as official data showed a total lack of growth following a month of intense geopolitical and fiscal uncertainty. The 0% GDP figure represents a setback for Chancellor Rachel Reeves, whose autumn budget continues to draw criticism from business leaders facing higher tax burdens. The stagnation was widespread, with the dominant services sector struggling to find its footing amid a sharp drop in consumer hospitality spending.
Market analysts had been looking for a 0.2% expansion, but those hopes were dashed by a combination of factors including severe weather and a cooling jobs market. The ONS report noted that the accommodation and food services sector fell by nearly 3%, marking a significant shift in consumer behavior. Simultaneously, the manufacturing and mining sectors saw a slight contraction of 0.1%, further weighing down the national average.
Geopolitics is now playing a starring role in the UK’s domestic health, as the US-Israel war on Iran has sent oil and gas prices through the roof. With Brent crude maintaining a position above $100 per barrel, the cost of doing business is rising just as the Bank of England was expected to ease monetary policy. The sudden price spike has introduced a fresh layer of uncertainty, making it difficult for firms to commit to long-term investments.
Economists at Deutsche Bank warned that the “Iran conflict bubbling in the background” is creating significant headwinds that will likely drag down growth throughout the first half of the year. The squeeze on real incomes is expected to worsen if energy facility attacks in the Middle East continue to outpace the release of strategic reserves. This environment makes the prospect of an interest rate cut next week highly unlikely, according to most City observers.
Despite the bleak monthly data, the three-month trend through January showed a marginal increase of 0.2%, providing a small silver lining. Chancellor Reeves has promised to outline a more detailed plan for growth in a high-profile speech next week. However, without a stabilization in energy markets, the UK may find itself stuck in a period of low growth and high inflation for the foreseeable future.