Economy finds reverse gear in January with surprise contraction

Cliff Notes – Economy finds reverse gear in January

• The Economy finds reverse gear in January it contracted by 0.1% in January 2025, contrary to expectations of a modest growth of 0.1%, primarily due to a decline in manufacturing output.
• Chancellor Rachel Reeves is facing significant challenges, including impending tax hikes and a £40bn bill from increased employer national insurance contributions, which threaten job security and economic stability.
• The Office for Budget Responsibility is expected to downgrade growth forecasts, as global economic uncertainties, including a trade war initiated by Donald Trump, loom large over the UK’s economic outlook.

Economy finds reverse gear in January with surprise contraction

The UK economy shrank at the start of 2025, according to official figures which had been expected to show further meagre growth.The Office for National Statistics (ONS) said that output declined by 0.1% during the month following the 0.4% growth seen in December.

A growth figure of 0.1% had been tipped by a majority of economists. The ONS said a slump in manufacturing output was to blame.

Biggest cuts in fixed rate mortgage deals in almost six months

It marks a fresh blow for the chancellor as the economy faces headwinds on many fronts at a time when her priority is securing economic growth. Looming large for Rachel Reeves is the threat of an adverse business reaction to budget tax hikes she is due to impose from April.

Firms are facing the bulk of the £40bn bill through employer national insurance contributions and warning of job losses, weaker pay rises and investment and possible price hikes to account for the surge in costs. Other challenges include the escalating trade war initiated by Donald Trump, which is tipped by economists to dent growth prospects globally.

Ms Reeves is low on ammunition as she prepares a spring statement for MPs later this month, with the welfare bill set to be slashed to avoid breaking her own spending rules. At the same time, the independent Office for Budget Responsibility is widely expected to downgrade its forecasts for UK growth ahead.

The world has changed and across the globe

The chancellor said of the ONS data: “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.

“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.”

Conservative Shadow Chancellor, Mel Stride, responded: “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.”