Market News

BY Richard Partington Senior economics correspondent

The UK economy unexpectedly flatlined in January, stoking concerns over growth amid the global energy price shock triggered by the US-Israel war on Iran.

Figures from the Office for National Statistics (ONS) showed 0% growth in gross domestic product (GDP), down from an increase of 0.1% in December, as the economy failed to recover from uncertainty surrounding the chancellor Rachel Reeves’s autumn budget.

Falling significantly short of City predictions for growth of 0.2%, the figures came as the UK and other countries faced a potentially severe economic hit as the Middle East conflict drove up oil and gas prices, hitting consumers with higher living costs.

The pound fell against the US dollar after the figures were released.

In a fresh blow to the government’s growth ambitions after a challenging start to the year, output in the service sector flatlined amid falls in recruitmentactivity and the hospitality sector.

Unemployment in the UK has risen to the highest level in five years in recent months, with businesses complaining that employer tax increases and a rising “national living wage” are hitting jobs. Hiring has fallen most in sectors such as hospitality and retail.

The ONS said the fall in employment activities was the largest negative contribution from a single industry to monthly GDP. The next largest was accommodation and food service activities, with food and beverage services falling by 2.7% as fewer people ate out in restaurants, pubs and cafes.

The production sector – which includes manufacturing, mining, and energy generation – fell by 0.1% on the month, while the construction industry grew by 0.2%.

Analysts said it was possible the economy had been held back in January by the effects of Storm Goretti and water supply outages in Kent that forced some businesses to close.

Over the broader three months to the end of January, growth rose by 0.2%.

Paul Dales, the chief UK economist at the consultancy Capital Economics, said: “With GDP not rising at all in January, it is clear the economy was subdued even before the leap in energy prices triggered by the Middle East conflict.”

Oil prices continued to trade above $100 a barrel on Friday, as widespread Iranian attacks on energy facilities across the region overshadowed a vast release of government reserves. The price of crude has surged by more than a quarter since the start of the conflict a fortnight ago.

Analysts said that if sustained, higher energy prices would drive up inflation, dashing hopes of an interest rate cut from the Bank of England next week. Financial markets anticipate Threadneedle Street could be forced to increase borrowing costs this year or in 2027.