Introduction: UK economy shrinks 0.1% in January following decline in factory output
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK economy unexpectedly shrank in January following a decline at factories.
GDP is estimated to have fallen 0.1% in January, mainly caused by a 0.9% fall in the production sector, according to the Office for National Statistics. This comes after 0.4% economic growth in December. Economists had expected the economy to grow by 0.1% in January.
It was a poor month for manufacturing and construction, both in decline, while the dominant service sector eked out meagre growth. The news dealt a blow to the chancellor, Rachel Reeves, ahead of her spring statement in two weeks’ time.
Monthly services output grew by 0.1% in January, following 0.4% growth in December, while construction output fell by 0.2% following a same-sized decline in December.
GDP is estimated to have grown by 0.2% in the three months to January, compared with the three months to October, mainly because of growth in the services sector.
Asian stock markets are mostly up, despite a sell-off on Wall Street sparked by Donald Trump’s tariff policies. Yesterday, Trump threatened to hit imports of wine, cognac and other alcohol from the European Union with a 200% tariff.
The escalating trade war dragged the S&P 500 on Wall Street more than 10% below its record, set just last month. A 10% decline from a recent peak is known as a “correction” — and Thursday’s 1.4% slide in the S&P 500, a key US stock market index, sent it to its first correction since 2023.
Gold surged through $3,000 an ounce last night, but is down slightly at $2,986 at present. The value of gold has nearly doubled in the past five years.
Chinese stocks led the gains in Asia amid expectations of policy support from Beijing, with top government officials set to hold a press briefing on Monday. The Shanghai exchange rose by 1.7% while the Shenzhen market bounced by 2.1%, and Hong Kong’s Hang Seng climbed by 2.2%. Japan’s Nikkei was up by 0.7%.
Stock market futures are pointing to a higher open in Europe and on Wall Street later.
There is some relief after top US Senate Democrat Chuck Schumer signalled his party would provide the votes to avert a government shutdown in the US.
The Agenda
Key events
German inflation dips to 2.6% in February
Inflation in Germany, Europe’s largest economy, dipped to 2.6% last month, lower than previously thought.
The country’s federal statistics office (Destatis) had initially estimated that annual inflation, harmonised to compare with other EU countries, remained at 2.8% for the second month in a row.
It has also revised down the month-on-month change in inflation to 0.5% from 0.6%. Destatis did not give a reason for the revisisions.
The national measure of inflation stayed at 2.3% in February, unrevised. Food and services prices drove up inflation while energy prices had a downward effect on the consumer price index.
Turning to the the 10% plus slide in the S&P 500, a key US stock market index, since its recent peak in January, which is known as a correction.
In a research note entitled “pain,” George Saravelos, global co-head of currency research at Deutsche Bank in London said there could a be bigger shift underway regarding the dollar’s safe-haven status.
Something painful is happening: European investors are currently losing as much money on their S&P 500 holdings as they did during the ~30% inflation-driven sell-off in 2022. Why? Despite the drop in US equities, the dollar has failed to rally. Dollar weakness this year has been additive rather than offsetting to underlying asset losses. It is clear from our conversations with real money investors that the risk-reducing properties of unhedged dollar exposure have played a key part in portfolio allocation over the last decade. When “bad things” happen the dollar tends to rally, so unhedged US risky assets have proven a highly attractive portfolio diversifier. Yet this is now changing.
We argued a few days ago that it is the idiosyncratic downward repricing of US fiscal, growth, and Fed expectations that is causing the dollar to weaken alongside US equities. Broader rhetoric that challenges the international rule of law may also be undermining dollar safe-haven perception. If this correlation breakdown between US equities and the dollar continues, it will open up a more structural discussion among European (and global) asset managers on the diversification benefits of unhedged risky-asset dollar exposure. Some press reports suggest this may already be starting. By extension, a sizeable net reduction of dollar exposure would be on the cards.
We have for a long time not been believers in the concept of a new (say, Mar-A-Lago) currency accord to weaken the dollar. We do believe that policy that undermines the economic soundness of the dollar would achieve the same thing.
Brexit continues to hurt the UK economy.
British food and drink exports to the EU have tumbled by more than a third since Brexit, according to new trade body figures highlighting how bureaucratic barriers have changed the relationship between the UK and its most important trading partner.
Products including whisky, chocolate and cheese remain popular with EU customers but overall food export volumes to the bloc fell to 6.37bn kg in 2024, representing a 34% decline compared with 2019 levels, the Food and Drink Federation (FDF) found.
While some of the fall in exports since the UK left the union in January 2020 can be attributed to global events including the Covid pandemic and the war in Ukraine, the FDF’s latest trade snapshot reveals other European countries including the Netherlands, Germany and Italy have increased their export volumes since 2020. The trade body has blamed post-Brexit trading arrangements for the slump in UK exports.
The total volume of food and drink imports to the UK rose to their highest ever level last year, at a time when British farmers are warning that a “cashflow crisis” and series of pressures including planned tax changes, bad weather and rising costs are squeezing domestic food production.
The EY Item Club forecasting group expects economic growth to be “relatively steady” this year and points out that monthly GDP data can be noisy.
Most of the sectors that enjoyed a strong December saw output drop back in January, with the manufacturing sector being a notable example. This weakness was partially offset by stronger output in the consumer-facing parts of the services sector, with a rise in distribution activity founded on a significant increase in retail sales in January.
Matt Swannell, chief economic advisor to the EY Item Club, said:
Monthly GDP data can be noisy, and it was always likely that there would be some payback in January from December’s strong reading. Today’s softer reading was in line with our expectations. The launchpad from a strong expansion at the end of last year means we expect quarterly GDP growth to be around 0.3% in Q1, a step up on the pace seen in the second half of 2024.
Looking further ahead, we think growth is likely to be relatively steady this year, running at a similar steady pace to Q1. We expect a modest pickup in consumer spending growth, with firming household confidence offsetting the drag from weaker real income growth. However, the lagged passthrough of past interest rate rises, tighter fiscal policy, and rising trade policy uncertainty are likely to prevent a stronger pickup in momentum.
JPMorgan economist Allan Monks said:
We had looked for further growth in January: retail sales rebounded in the month and the impact of government stimulus was expected to continue to support activity. That was evident in this report, with a strong gain from the distribution sector coming alongside a 0.4% increase in health and social output.
At the same time, however, consumer-facing services showed only a soft 0.1% rise, with declines in accommodation, food services and entertainment. Business services such as IT, communications and finance also showed declines. And there was the offset from the weakness on the goods side, which tends to be more influenced by global trends. In January, metals and pharmaceuticals production showed large contractions.
This release leaves weaker growth momentum in place at the start of this year, but first-quarter GDP should still print positively. The level of output in January remains 0.2% above the fourth-quarter average, and we expect the government sector to continue to boost growth during the first quarter. The manufacturing sector and some parts of services may also rebound in February.
We have revised down our forecast for first-quarter GDP from an annualised 1.8% to 1.4%. This implies there is still upside risk around the BoE’s 0.4% annualised forecast for Q1. There is, however, more of a concern about the underlying health of the private sector.
GDP figures show 1.1% drop in manufacturing; services lifted by retail
Let’s look at the GDP figures in more detail.
The 0.9% drop in production output in January, which came after 0.5% growth in December, was mainly caused by a 1.1% slump in manufacturing while mining and quarrying also declined. Basic metals and metal products were down along with pharmaceutical products.
Retailers fared better.
The ONS said the largest positive contributions to services in January came from retail (excluding car sales), up 1.7%; scientific research and development, up 5.5, and rental and leasing activities, up 3%.
Here’s some instant analysis from our economics editor Heather Stewart:
For a government that has made growth its overriding mission, the 0.1% decline in GDP in January signalled by the office for national statistics on Friday will be depressing news.
As Rachel Reeves prepares to deliver her spring statement on 26 March, the economy appears to be going in the wrong direction – underlining the fact that the Office for Budget Responsibility is likely to have presented her with notably weaker forecasts than in October.
These monthly data are more volatile than the closely-watched quarterly growth rates and can often be revised; but it appears the UK was stagnating even before Donald Trump began tearing up the global trading system.
The ONS blamed weak manufacturing output, down by 1.1% on the month, and construction, which fell by 0.2%, for the poor GDP readout. Services output expanded, though only by 0.1%.
Within construction, the issue was a 0.7% a decline in new work, the number-crunchers said – a worrying signal, given the government’s commitment to building 1.5m new homes over this parliament.
While it does not appear to point to a recession, that remains a relatively weak backdrop, against which the UK’s firms are now having to wrestle with the uncertainty created by the White House’s on-off tariffs policies.
Sterling has edged down by 0.19% on the day to $1.2921 after the disappointing GDP figures came out, but the pound is still slightly higher against the dollar over the week.
The probability of an interest rate cut at the Bank of England’s meeting next Thursday has gone up very slightly, but is still seen as very unlikely, with markets estimating a chance of just over 8%, versus just below 7% yesterday.
The TUC admits that restoring the economy to long-term growth will be a “bumpy ride – especially after 14 years of Tory stagnation” and called for an interest rate cut next week.
The federation of trade unions’ general secretary Paul Nowak said:
The government’s approach is taking us in the right direction.
But there is still much more to do. Creating secure, decently paid jobs – the bedrock of a strong and resilient economy – will play a crucial role in reviving finances for families, and the country.
The Bank of England also needs to continue playing its part. An interest cut next week is key to keep supporting spending and growth.
Turning to the forthcoming spring statement, he added:
These figures show the need for public investment.
Investment in public services and infrastructure will bring our economy back on track. Stronger growth is the best way to secure sustainable public finances.
And here are the Liberal Democrats. Treasury spokesperson Daisy Cooper said:
The chancellor’s wretched budget [in October] has left our economy on life support so the spring statement must deliver a much needed shot in the arm.
Just as the chancellor’s jobs tax is set to hammer small businesses and plunge high streets into despair, the government’s refusal to negotiate a bespoke UK-EU customs union to unleash economic growth is baffling.
At the statement, 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.
The Institute of Chartered Accountants in England and Wales’ economics director Suren Thiru has described the drop in economic output as “unnerving”.
He said:
These figures confirm an unnerving drop in economic output during January’s financial market turbulence, as a notably poor month for construction and manufacturers severely hindered overall activity.
The UK’s economic performance may have been similarly downbeat in February, with any boost from consumer spending amid strong wage growth and lower interest rates weakened by the brake on business activity from this torrent of global uncertainty.
This decline makes the upcoming spring statement more problematic as it reinforces the prospect of a notable downgrade to the Office for Budget Responsibility’s growth forecasts, further undermining the chancellor’s spending plans.
Despite these disappointing figures, a rate cut next week looks unlikely as rate setters will probably want to assess the impact of April’s national insurance hike on inflation before sanctioning another policy loosening.
The Unite union has urged the government to take action to improve jobs, pay and conditions, warning that “we won’t get growth by sitting on our hands”.
Unite general secretary Sharon Graham said:
Securing good jobs for the future, along with collective bargaining through trade unions is by far the best route to growth. Workers spend their wages in their local economies – they don’t send their money to the Cayman Islands.
So if we are serious about improving the economy, the government needs to move quicker and more decisively on improving jobs, pay and conditions – we can’t afford to wait for the investment, employment laws and joined up industrial strategy that the country needs. We won’t get growth by sitting on our hands.
And here is Rachel Reeves, the chancellor, responding to the drop in GDP.
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.
Here is some instant reaction.
Hailey Low, associate economist at the National Institute of Economic and Social Research, a respected UK think tank, called on the chancellor, Rachel Reeves, to use her spring statement on 26 March to provide stability, rather than add to uncertainty.
The UK economy started 2025 on a negative note. Following the lacklustre performance in the second half of 2024, growth remains fragile due to global and domestic uncertainty.
It is crucial that the upcoming spring statement provides stability rather than adding to domestic uncertainty. Frequent policy U-turns risk undermining business and investor confidence at a time when clarity and consistency are most needed.
Introduction: UK economy shrinks 0.1% in January following decline in factory output
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK economy unexpectedly shrank in January following a decline at factories.
GDP is estimated to have fallen 0.1% in January, mainly caused by a 0.9% fall in the production sector, according to the Office for National Statistics. This comes after 0.4% economic growth in December. Economists had expected the economy to grow by 0.1% in January.
It was a poor month for manufacturing and construction, both in decline, while the dominant service sector eked out meagre growth. The news dealt a blow to the chancellor, Rachel Reeves, ahead of her spring statement in two weeks’ time.
Monthly services output grew by 0.1% in January, following 0.4% growth in December, while construction output fell by 0.2% following a same-sized decline in December.
GDP is estimated to have grown by 0.2% in the three months to January, compared with the three months to October, mainly because of growth in the services sector.
Asian stock markets are mostly up, despite a sell-off on Wall Street sparked by Donald Trump’s tariff policies. Yesterday, Trump threatened to hit imports of wine, cognac and other alcohol from the European Union with a 200% tariff.
The escalating trade war dragged the S&P 500 on Wall Street more than 10% below its record, set just last month. A 10% decline from a recent peak is known as a “correction” — and Thursday’s 1.4% slide in the S&P 500, a key US stock market index, sent it to its first correction since 2023.
Gold surged through $3,000 an ounce last night, but is down slightly at $2,986 at present. The value of gold has nearly doubled in the past five years.
Chinese stocks led the gains in Asia amid expectations of policy support from Beijing, with top government officials set to hold a press briefing on Monday. The Shanghai exchange rose by 1.7% while the Shenzhen market bounced by 2.1%, and Hong Kong’s Hang Seng climbed by 2.2%. Japan’s Nikkei was up by 0.7%.
Stock market futures are pointing to a higher open in Europe and on Wall Street later.
There is some relief after top US Senate Democrat Chuck Schumer signalled his party would provide the votes to avert a government shutdown in the US.
The Agenda
