Hopes for a spring interest rate cut have been dealt a major blow after the UK economy unexpectedly flatlined in January. With GDP growth at 0%, the economy has failed to build on the modest gains seen at the end of last year. This stagnation, paired with a massive spike in energy prices due to the war in Iran, suggests that the Bank of England may be forced to keep rates higher for longer to combat rising inflation.
The ONS data suggests that businesses are feeling the pinch of both global shocks and domestic policy changes. Output in manufacturing and mining fell, while the vital services sector was weighed down by a significant drop in food and beverage sales. Analysts believe that the combination of higher taxes and the rising national living wage has created a “wait-and-see” approach among employers, leading to a visible slump in hiring activity.
The energy market remains the biggest threat to the UK’s near-term stability. Despite a vast release of government reserves, oil prices have surged by 25% since the Iran conflict began. This has direct implications for UK consumers, who are likely to face another round of utility bill increases and higher prices at the pump. Economists warn that this “squeeze” will inevitably drain liquidity from the rest of the economy.
Capital Economics has already begun revising its growth forecasts for the year, suggesting that 2026 could see growth as low as 0.1% if the Middle East crisis intensifies. This is a significant downgrade from earlier predictions and highlights the fragility of the post-budget recovery. The Chancellor is under increasing pressure to intervene, with an emergency speech scheduled for early next week to address the energy crisis.
Rachel Reeves responded to the GDP report by reiterating that the government’s focus is on long-term security rather than short-term fixes. She emphasized that the current plan aims to create the conditions for sustainable growth across all regions. However, with “animal spirits” at a low ebb and unemployment rising, the government faces a difficult balancing act between fiscal responsibility and economic stimulation.