UK GDP fell 0.1% month-on-month in January, following growth of 0.4% in December, largely due to a 0.9% fall in production output.
The unexpected fall was below economists' predictions of 0.1% growth for the month.
However, real GDP is estimated to have grown by 0.2% in the three months to January, compared to three months to October 2024, due to a growth in the services sector.
Some industry experts predict that the UK economy should see some improvement as we move through 2025, but others are more pessimistic, believing that this could signal the start of a slide into recession.
Nicholas Hyett, investment manager at Wealth Club, commented: “This is not the news the Chancellor would have wanted before this month's Spring statement, with the economy shrinking when it had been expected to show modest growth.
"The slowdown has been driven by a big slowdown in manufacturing output - unsurprising given the very uncertain outlook for exports with ever changing tariffs. Services too has slowed dramatically, particularly in sectors like accommodation and food services which expect to be hit hard by higher living wage and employer national insurance contributions in April.
"That's the really worrying thing about these numbers. Tariffs and increased labour costs were more worries than reality in January, the month covered by these numbers. 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."
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “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. This worse than expected figure follows what had been a surprise 0.4% uptick in growth in December 2024, driven by strength in the services sector. Propped up by the stronger number at the end of last year, real GDP is estimated to have grown by 0.2% in the three months to January 2025.
“On a monthly basis, economic growth can appear to be quite choppy, but the bigger picture shows a stagnant economy. Talks of trade wars are now consistently making headlines, and this is likely to be unhelpful as far as UK consumer confidence is concerned. The government will be pinning its hopes on consumption holding up in the first quarter of the year and that the economy avoids slipping into recession further down the line.
“The Spring Statement is now less than two weeks away, and it is becoming increasingly clear that Chancellor Rachel Reeves finds herself in a very difficult position. The Bank of England recently halved its forecast for economic growth from 1.5% to 0.75% in 2025. Given fiscal headroom is highly sensitive to changes in growth expectations, the previous £9.9bn of headroom will almost certainly no longer be available. 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.
“Today’s figures also provide the last snapshot of the economy before the Bank of England’s interest rate decision next week. While the economy is somewhat reliant on interest rate cuts to shore up consumer confidence, the recent higher than expected rise in inflation means the likelihood of a further rate cut from the Bank remains fairly slim given it will be wary of cutting too much too quickly.
“With hope, the UK economy should see some improvement as we move through 2025, but the impacts of US tariffs are only just beginning to unfold, so we will be wading through a sea of uncertainty for some time yet.”
Derrick Dunne, CEO of YOU Asset Management, added: “Monthly GDP continues to seesaw between growth and contraction. Growth over three months was little better, with a measly 0.2% rise. This reflects that in the final months of the year and the beginning of 2025 businesses were having to begin adjusting to tax rises, while households continued to face higher rate expectations.
“While these short-term data sets are always subject to revision, it does give us a signal of the weakness of the growth as a whole in the UK and uncertainty that abounds in the economy. This is the clearest indication yet that we’re in for a bleak Spring Statement in two weeks from Rachel Reeves.
“These GDP figures are making the Chancellor’s job ever more difficult and the outlook more troubling. A fresh rate decision is also due ahead of the Spring Statement but will likely provide little relief. The Government’s growth agenda is laudable, but it is also a long-term process – one that isn’t going to alleviate problems in the here and now.
“While the Spring Statement has been billed as a routine fiscal update, it is becoming increasingly clear that we could be set for some new tax and spending measures. The situation is simply too serious to simply ignore. Whether this means more tax on wealth, such as inheritance levies, remains to be seen."
