UK GDP: weak GDP keeps pressure on Spring Statement

The economy disappointed in January, contracting by 0.1%. After growth surged in December by 0.4% month-on-month (m/m), there was always a chance it would slow again as global headwinds and uncertainty weigh on growth.

Negative growth might ordinarily prompt recession fears of a recession. However, underlying output looks stronger than January’s headline GDP suggests (see Figure 1). The economy actually grew by 0.2% when looking at the figures 3m/3m. Still, any increase in 2025 will likely come in well below the 2% the OBR predicted back in October. This makes Chancellor Rachel Reeves’s job even harder, with even more tough choices, ahead of the Spring Statement on 26 March. 

Yet we doubt the bad GDP news will be enough to convince the Bank of England (BoE) to cut interest rates at its meeting next week.

What the latest GDP data tells us

Beyond the headline figure, the UK’s growth story remains largely unchanged at the start of 2025. Impressive performance in retail and administrative services weren’t enough to push the economy into positive territory overall.

This is because weakness in manufacturing continues to weigh heavily on growth, as shown in Figure 2. The sector contracted 1.1% in January. Fragile economic growth in Europe and tariff uncertainty are clearly inhibiting the sector’s performance.

In construction, output fell 0.2% m/m for the second time. While repairs and maintenance rose 0.4%, the collapse in new work, which fell 0.7%, drove the decline entirely. In February, the S&P Global UK Construction PMI sank to its lowest level since Covid-19. Overall, we think when February’s official data is published it will show the sector may have fallen even further.

Services once again proved to be a relatively bright spot, growing by 0.1% m/m. However, it wasn’t enough to offset declines elsewhere in the economy. There was clearly a shift in where consumers are spending their money, shunning bars, restaurants and entertainment venues in favour of restocking their cupboards and wardrobes. 

Accommodation and food services slumped by 2.4% m/m, as did the arts, entertainment and recreation sector. April’s increases in Employer National Insurance Contributions (NICs) and both the National Minimum and Living Wage (NMW/NLW) will hit hospitality particularly hard. 

However, retail services, another sector that will feel the upcoming changes harder than most, grew 0.7%. But it was administrative services that performed strongest. Here, output increased 1.9% m/m after already jumping 1.1% in December.

The UK economy – outlook for 2025

This year’s higher government spending and consumers’ higher real incomes should start to filter through the economy and allay any worries that January’s GDP drop will translate into a wider recession.

The biggest risk to growth comes from ongoing uncertainty and volatility in global trade policy and financial markets depressing growth further. Trade was the main reason GDP performance disappointed in the latter half of 2024. There seems little respite from this scenario as the UK’s major trading partners engage in tit-for-tat trade wars and retaliatory tariffs.

Weak growth won’t prompt the BoE to cut interest rates at the Monetary Policy Committee meeting next week. Pay growth remains persistent, inflation is rising, and the BoE will want to see how trade policy uncertainty plays out alongside the increase in Employer NICs before looking to cut again in May.

Despite growth underperforming and rising yields eroding the chancellor’s headroom against her fiscal rules, we doubt that the government will choose to raise taxes in the Spring Statement, instead opting for less generous future welfare payments. That won’t have much of an impact on growth this year, but it could further ahead.

Currently, our base case is for 1% growth in 2025, before picking up to 1.5% in 2026.