The economy shrank by 0.1 per cent in January according to figures just published by the Office for National Statistics (ONS). The news will come as a disappointing shock to Rachel Reeves after most economists had predicted the year to have started with growth. In December the economy had grown by 0.4 per cent, but a fall in production of 0.9 per cent and in construction of 0.2 per cent tipped the economy back into contraction. Services were up marginally but not by enough to lead to overall growth.
Liz McKeown, the ONS’s director of economic statistics, pointed to a ‘notable slowdown’ in manufacturing compounding a downturn in oil and gas extraction as well as construction. On the other hand, it was a strong month for food sales as more people ate and drank at home.
The contraction will alarm the government as economists had expected the economy to grow by 0.1 per cent after the three months to January saw growth of 0.2 per cent. In January – when the Reeves had made a number of interventions aimed at kick starting our economic engine, including backing a third runway for Heathrow airport. It seems these interventions are yet to have any effect.
With less than a fortnight to go before the Spring Statement in which the Chancellor is expected to confirm cuts to welfare and other spending in order to meet her fiscal rules and recover her headroom, this morning's news will put added pressure on the whole government to look for ways to boost Britain’s economy.
More problems will come from the Office for Budget Responsibility – who judge that headroom – when they give the Chancellor their final pre-statement forecast next Friday. It is highly likely they'll deliver a serious downgrade to growth forecasts, leaving Reeves even less room for manoeuvre.
The disappointing figures will put pressure on the Bank of England, too, to cut interest rates. They currently stand at 4.5 per cent but rate setters are unlikely to be moved by this as fears of resurgent inflation and worries about the role out of Trump’s tariffs are likely to dominate.
Responding to the figures this morning the Chancellor blamed international factors: ‘The world has changed and across the globe we are feeling the consequences... That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our Plan for Change.’ Reeves promised, too, to ‘take on the blockers and get Britain building again,’ but if living standards are to improve and if Britain is to grow we need to see these strong words turn into stronger actions sooner rather than later.
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