UK economy unexpectedly shrank by 0.1% in January

The U.K.'s economy unexpectedly shrank by 0.1% month-on-month in January, official figures showed on Friday.

Britain's Office for National Statistics said the fall was mainly due to a contraction in the production sector.

Economists polled by Reuters had expected the country's GDP to grow by 0.1%.

At 7:35 a.m. in London, shortly after the data release, the British pound was down by around 0.15% against the dollar to trade at $1.293. Sterling was flat against the euro.

Meanwhile, long-term government borrowing costs, which spiked to multi-decade highs earlier this year, rose. The yield on 20-year U.K. government bonds — known as gilts — added 2 basis points, while 30-year gilt yields were up by 4 basis points.

Services output picked up by 0.1% month-on-month in January, but marked a slowdown from the 0.4% hike of December. Production output dropped by 0.9% on the month, after recording a 0.5% rise in the previous month. Monthly construction output meanwhile fell by another 0.2% in January, after also shedding 0.2% in December.

The U.K. economy grew by 0.1% in the fourth quarter, beating expectations, ONS data showed last month. It flatlined in the third quarter.

The monthly GDP data has been checkered since then, with a 0.1% contraction in October, a 0.1% expansion in November and a 0.4% month-on-month expansion in December thanks, to growth in services and production.

Friday's GDP release will be the last data print before the U.K. Treasury's "Spring Statement" on March 26, when Chancellor Rachel Reeves presents an update on her plans for the British economy.

The statement is released alongside economic forecasts from the Office for Budget Responsibility, the U.K.'s independent economic and fiscal forecaster, which gives its assessment on the likely impact of the government's tax and spending plans.

There have been concerns that the Treasury's fiscal plans, which were laid out last fall and which will increase the tax burden on British businesses, could weigh on investment, jobs and growth. Reeves has defended the tax rises, saying they're a one-off measure and necessary to boost investment in public services.

The Bank of England made its first interest rate cut of the year in February, signaling further cuts were to come as it halved the U.K.'s growth forecast for 2025 from 1.5% to 0.75%.

Markets are widely expecting the Bank of England to hold rates steady at 4.5% at its Monetary Policy Committee meeting next week, LSEG data showed on Friday.

The central bank said it would judge how to balance the need to boost growth with the inflationary risk posed by U.S. President Donald Trump's trade tariffs. The U.K. has not been specifically targeted so far, but its exports of steel and aluminum to the U.S. will fall under Trump's blanket 25% import duties on the metals.

In a note on Friday, Paul Dales, chief U.K. economist at Capital Economics, said the data highlighted the weakness in the British economy before the impact of rising business taxes and geopolitical uncertainty had fully set in.

"Most of the weakness is just payback from the surprisingly strong 0.4% m/m rise in GDP in December," he said. "In other words, December's figures made the economy look stronger than it really was and January's make it look a bit weaker. The truth is probably that the underlying pace of growth is a little bit above zero."

He added that although U.S. President Donald Trump's blanket tariffs on steel and aluminum had only come into effect this week, they could already have impacted the U.K. economy.

"The 1.1% m/m fall in manufacturing output was partly due to a 3.3% m/m drop in metals output," he explained. "It's possibly related [to tariffs] as they have been anticipated for a while."

Speaking in parliament on Wednesday, Britain's Prime Minister Keir Starmer told politicians he was hopeful the U.K. could still evade Trump's protectionist trade policies.  

"I'm disappointed to see global tariffs in relation to steel and aluminium, but we will take a pragmatic approach," he said. "We are negotiating an economic deal which covers and will include tariffs if we succeed, but we will keep all options on the table."