UK economy starts the year in uninspiring form

Rob Morgan, Chief Investment Analyst at Charles Stanley 

Friday’s UK GDP numbers reaffirm the lacklustre state of the economy and will come as a disappointment to the Chancellor as she puts the final touches to her Spring Statement.

Having flatlined in the second half of last year, 2025 is off to an inauspicious start with a contraction of 0.1% in January.

Expectations were not high ahead of today’s numbers coming off the back of a decent print in December, but the outturn will probably disappoint even the pessimists.

The year-on-year number of 1% growth indicates an economy stuck in first gear rather than reverse, but with an outlook clouded by an uncertain trajectory of global inflation and additional costs heaped on employers the picture appears to be stagnant at best.

Can growth pick up?

Overall, there could be a small improvement in the short term. Consumers and businesses will continue to benefit from falling interest rates with three cuts made since last summer and another perhaps around the corner. A boost to government spending should also provide a temporary uplift.

It is likely to prove a struggle though. Many government initiatives including housebuilding and infrastructure investment could be hamstrung by a lack of construction and other skilled workers.

Meanwhile, consumer confidence and spending could be jeopardised by a deteriorating employment picture, plus some businesses are expected to retrench following Budget measures that involve higher employment costs.

The direction of inflation also hangs in the balance with higher energy prices, the impact of elevated employment costs and the wildcard of US tariffs still to unfold. It likely adds up to challenging scenario without concerted efforts to break the cycle of low growth and high government borrowing costs.

What does it mean for interest rates?

The economic environment is still fragile, and with today’s data the Bank of England’s won’t be having any regrets about last month’s decision to cut interest rates. It’s greater focus on the growing risks to growth is very much warranted, and a further cut to interest rates could be on the cards later this month.