UK economy shrank unexpectedly in January

The UK economy shrank unexpectedly in January, in a blow to the government ahead of its Spring Statement later this month.

The economy contracted by 0.1%, which was weaker than forecast, driven mainly by a decline in the manufacturing sector.

The government has made boosting growth its key priority, but the weakness of the economy is expected to affect Chancellor Rachel Reeves's decisions as she seeks to meet her self-imposed rules on tax and spending.

Reeves said the government needed to go "further and faster" on the economy, but the Conservatives accused it of being a "growth killer".

Economists had predicted the economy would grow by 0.1% in January, after 0.4% growth in December. Monthly readings can be volatile, and the ONS said the economy was estimated to have grown by 0.2% over the three months to January.

But the overall picture for the UK was one of weak growth, said Liz McKeown, ONS director of economic statistics.

Construction and oil and gas extraction had a weak month, she said.

But this was partially offset by retail, particularly food shops, "as people ate and drank at home more", she said.

With tax rises coming into force in April, concerns remain that economic growth will remain sluggish for some time.

Businesses have warned that paying more in National Insurance, along with minimum wages rising and business rates relief being reduced, could affect the economy's ability to grow, with employers expecting to have less cash to give pay rises and create new jobs.

In addition, firms are facing new uncertainty surrounding the tariffs being imposed by US President Donald Trump, while the government is also under pressure to increase defence spending.

Responding to the latest growth figures, Reeves said: "The world has changed and across the globe we are feeling the consequences."

She said the government was "launching the biggest sustained increase in defence spending since the Cold War", but this comes as public spending plans are under pressure as the chancellor seeks to meet self-imposed budget rules.

Last month, the Bank of England halved its growth forecast for the UK this year. At the Spring Statement later this month, the independent forecaster the Office for Budget Responsibility is also likely to downgrade its growth prediction.

This has led to expectations that government spending will have to be reined in so that Reeves can meet her tax and spending rules.

The government is expected to set out significant cuts to the welfare budget next week, as part of these cost savings.

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Conservative shadow chancellor Mel Stride said the Labour government was "a growth killer" after raising taxes and "crushing business with their extreme employment legislation".

Daisy Cooper, the Lib Dem Treasury spokeswoman, said Reeves's plan for growth leaves the economy "on life support", with tax changes "set to hammer small businesses".

John Dipre, the owner of Ashstead Park garden centre near Epsom in Surrey, said that changes to National Insurance contributions, less help with rates, and an increased minimum wage will "hit us hard".

"It's going to be very tough," he said. "If you really want to support growth, you need to be supporting small businesses, that's what England's all about."

Yael Selfin, chief economist at KPMG UK, said predictions of "sluggish growth" mean Reeves will probably "tighten purse strings" in the Spring Statement.

The recent cut to UK aid to fund an increase in defence spending "is a preview that some departments will see their spending plans squeezed", she added.

Anna Leach, chief economist at the Institute of Directors, said a slight rise or fall in GDP for one month was not significant, but the important point was the economy overall is "quite weak and therefore quite vulnerable".

Car manufacturers in particular have "notable weaknesses" with trade uncertainty from Trump tariffs, and "chopping and changing in the targets of the adoption of electric vehicles".

She said the UK growth figures "certainly won't help" in the lead-up to the Spring Statement.