Body blow for Rachel Reeves after GDP fell 0.1% in January

Rachel Reeves suffered a body blow today with figures showing the economy going into reverse.

GDP fell 0.1 per cent in January - defying expectations for a small increase - as production plunged despite the Chancellor's high-profile push for growth.

Although UK plc eked out 0.2 per cent expansion over the past three months, it will raise questions with looming headwinds from the massive Budget national insurance raid and Donald Trump's trade war.

Ms Reeves is already facing a struggle to balance the books and ramp up defence spending amid the Ukraine crisis, with the Spring Statement due on March 26. 

Responding to the gloomy findings this morning, Ms Reeves blamed wider turbulence. 

'The world has changed and across the globe we are feeling the consequences,' she said. 

Asked during a visit to Scotland this morning whether Mr Trump's tariffs attacks were hampering growth, Ms Reeves said: 'I believe, this Government believes, in free and open trade, and will continue to make that point.

'We are in negotiations at the moment for an economic agreement with the United States to try and ensure that British exporters are supported to export all around the world, including to the United States, and to ensure that they don't push up prices for UK consumers with more tariffs.'

Downing Street was more categorical hours later, with a spokesman flatly denying Mr Trump's policies were causing a slowdown.

He said: 'We know the cost-of-living crisis is not over, and this Government is determined to make people better off, and that's why economic growth is the Prime Minister's number one priority.'

The spokesman reiterated that the Government continue to engage with the US administration on tariffs, and insisted they were global and not targeted at the UK.

He added: 'As we've said, we won't be imposing tariffs immediately. And let's be clear, industry doesn't want to see a trade war where both sides keep escalating the situation, and standing up for industry means finding a solution. Our approach to the US remains one of a cool-headed approach, pragmatic. We continue to have productive discussions securing a wider economic deal.'

ONS Director of Economic Statistics Liz McKeown 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.'

The dip follows 0.4 per cent growth in December, as the economy continues to bump along the bottom.

Shadow chancellor Mel Stride urged Ms Reeves to 'think again' before the Spring Statement.

'It is no surprise that growth is down again, following near no growth in the last three months of 2024. After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation this government is a growth killer,' he said.

'Labour inherited the fastest growing economy in the G7 but since they arrived business confidence has collapsed and jobs are being lost.'

Suren Thiru, ICAEW Economics Director, said: 'These figures confirm an unnerving drop in economic output during January's financial market turbulence, as a notably poor month for construction and manufacturers severely hindered overall activity.

'The UK's economic performance may have been similarly downbeat in February, with any boost from consumer spending amid strong wage growth and lower interest rates weakened by the brake on business activity from this torrent of global uncertainty.

'This decline makes the upcoming Spring Statement more problematic as it reinforces the prospect of a notable downgrade to the OBR's growth forecasts, further undermining the Chancellor's spending plans.

'Despite these disappointing figures, a rate cut next week looks unlikely as rate setters will probably want to assess the impact of April's national insurance hike on inflation before sanctioning another policy loosening.'

Nicholas Hyett, Investment Manager at Wealth Club, warned of the risk that 'recession starts here'. 

'Tariffs and increased labour costs were more worries than reality in January, the month covered by these numbers,' he said. 

'Those worries will soon be transforming into realities. That leaves plenty of room for economic growth to deteriorate further, with far fewer catalysts to spark an economic recovery. We could be at the start of a long slow slide into recession.'