City snapshot: Economy shrinks unexpectedly ahead of spring Budget

The UK economy contracted unexpectedly in January, dealing Chancellor Rachel Reeves a blow ahead of the crucial spring budget later this month.

The latest data from the Office for National Statistics revealed the economy shrank 0.1% in January following a weaker than expected performance and growth of 0.4% in December. Economists had been anticipating growth of 0.1% for the month.

A slowdown in manufacturing output was one of the main drivers for the dip, with construction acting as another drag.

Production output fell by 0.9% in January 2025, following growth of 0.5% in December 2024, and fell by 0.9% in the three months to January 2025.

Growth for food shops helped offset the decline slightly as retailers were boosted by consumers eating more at home.

Liz McKeown, the 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.

“The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.

“However, services continued to grow in January led by a strong month for retail, especially food stores, as people ate and drank at home more.”

Yael Selfin, the chief economist at KPMG UK, said: “The UK economy starts the year on the back foot as global uncertainty casts a shadow on the outlook.”