The UK economy contracted by 0.1 percent in January 2025, delivering a blow to Chancellor Rachel Reeves and Prime Minister Keir Starmer’s economic agenda, according to the Office for National Statistics (ONS).
The downturn comes just weeks ahead of the government’s spring statement, where spending plans will be outlined.
The decline in gross domestic product (GDP) defied economists’ expectations of a 0.1 percent increase, marking a disappointing start to the year. However, in the three months leading to January, the economy showed slight growth of 0.2 percent, primarily driven by the services sector.
Liz McKeown, ONS director of economic statistics, noted that the economy continues to experience “weak growth” under Labour’s leadership.
“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.”
Liz McKeown
Chancellor Reeves defended the government’s economic approach, attributing the slowdown to global conditions rather than domestic policy failures. “Britain is feeling the consequences as the world has changed,” she said, stressing that Labour is committed to reforms that will protect the country and stimulate economic recovery.
“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.”
Rachel Reeves
However, opposition parties criticized Labour’s economic performance. The Conservatives branded the government a “growth killer” and blamed the contraction on Labour’s tax policies, including the upcoming national insurance increase set to take effect in April.
Shadow Chancellor Mel Stride argued that Labour’s policies have stifled business confidence. “It is no surprise that growth is down again, following near no growth in the last three months of 2024,” he remarked.
Stride further claimed that Labour inherited “the fastest-growing economy in the G7” but has since overseen a collapse in business confidence and job losses. He urged Reeves to reconsider her economic strategy before the upcoming emergency budget.
Calls For Urgent Economic Intervention
The Liberal Democrats also criticized the government, with Deputy Leader Daisy Cooper stating that Labour’s “wretched Budget has left our economy on life support.” She called on Reeves to use the spring statement to implement urgent economic interventions.
“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.”
Daisy Cooper
Despite Labour’s focus on economic growth since taking office, progress has been slow, with falling consumer confidence and persistent inflation creating additional challenges.
Paul Dales, Chief UK Economist at Capital Economics, cautioned that economic recovery remains uncertain. “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,” Dales warned.
Government ministers, however, maintain that Labour’s economic strategy will take time to yield results. Care Minister Karin Smyth emphasized that reversing the UK’s economic stagnation cannot happen overnight.
The latest GDP contraction marks another challenge for Reeves, despite a surprise uptick in growth in December 2024. With the government’s spring statement set for March 26, Reeves is expected to announce benefit cuts and other spending reductions to ensure fiscal stability.
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