The UK economy contracted by 0.1 per cent in January in a blow to Rachel Reeves and Sir Keir Starmer’s growth mission, according to the Office for National Statistics (ONS).
Just weeks before the chancellor delivers her spring statement setting out the government’s spending plans, the ONS said the economy started the year shrinking.
The fall in gross domestic product (GDP) was a shock, with most economists expecting it to have risen by 0.1 per cent in the first month of the year. Responding to the fall, the Conservatives branded Labour “growth killers”
But, for the three months to January, GDP was estimated to have grown by 0.2 per cent, driven by growth in the services sector.
ONS director of economic statistics, Liz McKeown, said the figures continued to show “weak growth” under Labour.
She said: “The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.
“However, services continued to grow in January led by a strong month for retail, especially food stores, as people ate and drank at home more.”
Ms Reeves said Britain was “feeling the consequences” as “the world has changed”, shifting the blame for the slowdown to international factors rather than her own Budget measures.
And she added: “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.
“And why we are launching the biggest sustained increase in defence spending since the Cold War, fundamentally reshaping the British state to deliver for working people and their families; and taking on the blockers to get Britain building again.”
But the Conservatives branded the Labour government a “growth killer” after the slump, pointing to policies such as Labour’s national insurance increase, which takes effect in April.
Shadow chancellor Mel Stride said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024.
“After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation, this Government is a growth killer.
“Labour inherited the fastest growing economy in the G7, but since they arrived business confidence has collapsed and jobs are being lost.
“The chancellor has 12 days until her emergency budget – she must think again or hard-working people will continue to pay the price of a Labour government without any business experience.”
And the Liberal Democrats said Labour’s “wretched Budget has left our economy on life support”.
Deputy leader Daisy Cooper said: “The spring statement must deliver a much needed shot in the arm.
“The chancellor must admit that her Budget has failed to reverse the years of Conservative economic vandalism and put forward a new plan that unleashes the growth potential of small businesses up and down the land.”
Labour has made growing the economy its key priority since winning the election last year but momentum has been slow amid falling consumer confidence and rising inflation.
And Capital Economics chief UK economist Paul Dales warned: “With the prospect of higher taxes from April having left business sentiment on the floor and the global backdrop deteriorating, the economy is unlikely to strengthen much from here”.
A minister said fixing the economy will take a “long time” after the January setback.
Care minister Karin Smyth told Sky News: “Growth is at the heart of what we need to do to fix the economy, and we know it’s going to take a long time.
“We know that the things we’re putting in place, some of the changes to planning law, some of the things we’re talking about in the NHS, getting people back to work, all those things are going to help.
“But we’ve had this low-growth, stagnating economy for the past decade. That’s what’s caused so many problems in our country. It is going to take time to fix it.
“It’s not good to see a very slight contraction this morning, but we think the measures that we’re putting in place, giving confidence to the economy, getting people back to work, will start to yield benefits.”
While the immediate pressure on Ms Reeves eased after a surprise jump in growth in the last month of 2024, the latest figures mark another setback.
In her statement on 26 March, Ms Reeves is expected to unveil a series of cuts to benefits and other spending in a bid to show she is on course to meet her self-imposed fiscal rules.
After October’s Budget, the government had £9.9bn of headroom against the rules, but stagnant growth and higher than expected inflation and borrowing costs have wiped out the chancellor’s wiggle room.
