The UK economy unexpectedly shrunk by 0.1 per cent in January, according to the Office for National Statistics (ONS), in a massive blow to Labour’s growth agenda.
The figure comes just weeks before Rachel Reeves’s spring statement on 26 March, when the chancellor will give her updated plans for the UK economy. Billions in welfare cuts and reduced spending for other departments are widely expected to form part of her announcement.
Responding to the new GDP figures, Ms Reeves said Britain was “feeling the consequences” of global events, likely referencing the ongoing Ukraine peace negotiations and US president Donald Trump’s imposition of international trading tariffs.
She said: “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.”
Liz McKeown, ONS director of economic statistics, said: "The economy shrank a little in January but grew in the latest three months as a whole, with the overall picture continuing to be of weak growth."
She added that a “notable slowdown” in manufacturing contributed to the slump, but said this was offset by a “strong month for retail”.
In the last quarter of 2024, there was no economic growth recorded as GDP levelled out across October, November and December. Since coming into power in July last year, the economy has grown 0.3 per cent overall under Labour – a figure the chancellor will no doubt want to improve upon in the coming months.
Is the UK headed for a recession?
There is no official definition of ‘recession’, but the popular understanding is that it is when at least two consecutive quarters of negative GDP growth occur. So any two three-month periods of back-to-back net economic downturns would technically be called a recession.
However, sometimes a sustained lack of growth is just that, and doesn’t mean the country is necessarily headed for a long period of economic turmoil. The severity and length of the recession is crucial to understanding how it will truly affect the economy.
For instance, from 2008 to 2009, GDP fell a massive five percentage points and did not recover until mid-2013. There was also a recession in 2020, at the height of the coronavirus pandemic. This only lasted for six months, but the 20.4 per cent fall in GDP recorded between April and June 2020 remains the largest on record.
Growth has remained broadly steady post-pandemic but has not quite returned to the upward trend seen between 2013 and 2019. However, with no growth recorded in Q4 2024, if GDP remains the same or falls in the first three months of 2025 then the UK will be in a technical recession.
What is GDP?
GDP stands for gross domestic product. It is the main way to measure economic activity in a country, taking into account companies, the government, and people.
The headline figure is measured by a combination of three figures: output, expenditure, and income.
Output looks at the total value of all goods and services produced by the economy. This includes manufacturing, agriculture, services and government.
Expenditure is a measure of the value of goods and services bought by households, alongside investments made by the government. It includes the value of exports, minus the value of imports.
How will this affect me?
Any economic growth is generally good news for UK households as it means people are getting paid more and companies are seeing higher profits, increasing the chance of new jobs being created.
It will also mean that the government has more money to spend on public services, as tax revenue will increase with rising private incomes.
When GDP goes in the opposite direction, the inverse effect can be expected. Less household spending power, job losses and public service cuts are all consequences of a severely shrinking economy.
During the pandemic, the government was forced to borrow billions to prop up the economy, with impacts still being felt today.
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