The unexpected contraction, following a 0.4% rebound in December, highlighted the fragile state of the economy and the risks facing both households and businesses in 2025, according to Nicholas Hyett, investment manager at investment platform Wealth Club. Hyett called the figures “not the news the Chancellor would have wanted before this month’s Spring Statement,” adding that the economy had been expected to show modest growth, not a decline. Hyett pointed to weakness across key sectors, especially manufacturing, which continues to struggle amid global uncertainty and shifting tariffs. “The slowdown has been driven by a big drop in manufacturing output — unsurprising given the very uncertain outlook for exports with ever-changing tariffs,” he added.
Although services posted a minor gain of 0.1%, Hyett warned that sectors like accommodation and food services are bracing for higher wage and national insurance costs in April, setting the stage for more pressure on businesses. “Tariffs and increased labour costs were more worries than reality in January,” Hyett shared. “Those worries will soon be transforming into realities. That leaves plenty of room for economic growth to deteriorate further, with far fewer catalysts to spark an economic recovery. We could be at the start of a long slow slide into recession.
The January figures also reflected a 0.9% fall in production output — a key factor behind the month’s overall decline. Richard Carter, head of fixed interest research at Quilter Cheviot, noted that this was the main reason for the disappointing start to 2025. “The UK economy has had a disappointing start to 2025, with monthly real GDP contracting by 0.1% in January largely due to a 0.9% fall in production output,” Carter said. Although December’s stronger figure gives some lift to the rolling three-month measure — with GDP growing 0.2% in the three months to January — Carter cautioned that “on a monthly basis, economic growth can appear quite choppy, but the bigger picture shows a stagnant economy.
Adding to the uncertainty, Carter flagged growing worries about international trade tensions. “Talks of trade wars are now consistently making headlines, and this is likely to be unhelpful as far as UK consumer confidence is concerned,” he said. “The government will be pinning its hopes on consumption holding up in the first quarter of the year to avoid slipping into recession — but that’s a fragile hope at best.”
Looking ahead to the Spring Statement, Carter said the government is in a tight fiscal corner. “The Bank of England recently halved its forecast for economic growth from 1.5% to 0.75% in 2025,” he noted. “Given fiscal headroom is highly sensitive to changes in growth expectations, the previous £9.9 billion of headroom will almost certainly no longer be available.” He added that the Chancellor faces difficult trade-offs: “The government is between a rock and a hard place given its repeated assurances that it will not raise taxes for working people. The alternative is to cut spending elsewhere and take from what are already stretched resources.”The January GDP figure also lands just ahead of the Bank of England’s next interest rate decision. While some had hoped for rate cuts to support growth, Carter was cautious about that prospect.
“The economy is somewhat reliant on interest rate cuts to shore up consumer confidence, but the recent higher-than-expected rise in inflation means the likelihood of a further rate cut remains fairly slim,” he said. “The Bank will be wary of cutting too much, too quickly. “With additional cost pressures on businesses and consumers expected in April — including higher living wage requirements and national insurance contributions — and the impact of US tariffs only beginning to unfold, the near-term outlook remains clouded. As Carter summed up, “With hope, the UK economy should see some improvement as we move through 2025, but we will be wading through a sea of uncertainty for some time yet.
SOURCE: Fund Europe
