‘Taxed to a standstill’ – UK economy grinds to a halt with no growth in January
The UK economy saw zero growth in the first month of the year – before global markets were rocked by the outbreak of war in the Middle East.
Fresh figures from the Office for National Statistics (ONS) have handed a major blow to Rachel Reeves with the economy flat in January, compared to the 0.2 per cent expansion that was forecast by City economists.
It came as the all-important services sector – often seen as the engine of the UK economy, contributing over 80 per cent to GDP – was flat at the begging of the year.
Meanwhile, production contracted by 0.1 per cent and construction grew by 0.2 per cent.
Daniela Hathorn, senior market analyst at Capital.com, said: “The flat GDP reading for January reinforces the sense that the UK economy entered 2026 on fragile footing, even before the geopolitical shock in the Middle East.”
For the three months to January, growth remained sluggish at 0.2 per cent, led by a 1.3 per cent expansion in production and 0.2 per cent in GDP, whilst construction contracted two per cent.
“Growth ticked up slightly in the latest three months, partly reflecting the recovery of car manufacturing following the cyber incident in Autumn,” Liz McKeown, director of economic statistics at the ONS, said.
“However the overall picture remains subdued, with no growth in the latest month.
“There was another large fall in the construction industry in the latest three months, with continued contraction in housebuilding.”
Julian Jessop, economics fellow at the Institute of Economic Affairs, said: “The latest GDP data show that the UK economy is being taxed and regulated to a standstill.
“The “steady as she goes” Spring Statement now looks even more like a missed opportunity to change course.”
‘Sluggish and unexciting’ economy
Lindsay James, investment strategist at Quilter, said the fresh figures today showed the economy is continuing on a “sluggish and unexciting path.”
“The problem facing the UK is that despite the government saying they need to stick to the plan to produce economic growth, forecasts point to very little improvement, with even 2% growth a year becoming a pipe dream.”
He added whilst the economy managed to “confound expectations” of a recession last year, the news follows a fresh downgrade from the Office for Budget Responsibility, which cut growth forecasts for 2026 at the Spring Statement.
Economists at Capital Economics said they previously had pencilled in one per cent growth “but under various scenarios for the length and severity of the jump in energy prices, it could be either 0.6 per cent, 0.4 per cent or 0.1 per cent instead.”
Chancellor Rachel Reeves said: “Our economic plan is the right one, but I know there is more to do.
“In an uncertain world, we are building a stronger and more secure economy by cutting the cost of living, cutting national debt and creating the conditions for growth to make all parts of the country better off.”
Meanwhile, shadow business secretary Andrew Griffith said: “The economy is just stuttering along – much like the prime minister.
“For a government whose supposed obsession was growth, it’s not going well. Time for a change.”
A blow to economy before the bigger storm
The GDP figures for January came ahead of a period of turmoil that rocked global economies after conflict broke out in the Middle East.
Rachel Reeves weighed in earlier this week warning the Iran war was “likely to put upward pressure on inflation in the coming months”.
The Chancellor’s statement came after economists across the board warned of the inflationary impact of surging energy prices.
Oil prices surged past $100 again on Thursday morning on the news two tankers in the gulf had been attacked. Prices remained volatile despite the International Energy Agency (IEA) making a record intervention in the market on Wednesday, with the release of 400m barrels from the strategic reserves.
Analysts at the RBC Capital Markets have warned that a long-lasting war could “tilt” the UK economy into an “outright recession” given the state of the country’s vulnerable jobs market.
“Labour markets are in a substantially weaker position now than was the case in 2022 and there must also be a non-trivial possibility that firms will not be able to pass on prices fully and have to take margin cuts instead.”