The UK economy unexpectedly flatlined in January, with official data revealing zero growth in gross domestic product (GDP), defying economists' predictions and raising concerns about the impact of the escalating Iran conflict on inflation and future economic performance.
Subdued Economic Picture
The Office for National Statistics (ONS) reported that GDP showed no change in January, following a meagre 0.1% growth in the final quarter of last year. This stagnation comes amid budget uncertainty and a subdued December performance, where growth also stood at 0.1%. Most economists had anticipated a 0.2% increase for January, making the flatlining result a significant surprise.
Liz McKeown, ONS director of economic statistics, emphasised that the "overall picture remains subdued" for the UK economy. The data highlighted particular weakness in housebuilding, with private housing new work plummeting by 5.6% in January—the sharpest decline since March 2020 at the onset of the Covid-19 pandemic.
Sectoral Performance and Broader Trends
During January, the crucial services sector recorded no growth, while manufacturing output edged up by 0.1% and construction saw a modest 0.2% increase. Over the three months leading to January, GDP is estimated to have grown by 0.2%, according to the ONS.
Chancellor Rachel Reeves acknowledged the figures emerge in an "uncertain world," pointing to the Iran war as a key threat. The conflict has already driven oil, fuel, and gas prices sharply higher, risking a further inflationary spike that could undermine economic stability.
Inflation and Growth Forecasts Under Pressure
The Office for Budget Responsibility (OBR) warned earlier this week that sustained energy price increases, fueled by the US-Israel war with Iran, could push UK inflation to nearly 3% by year-end—one percentage point above previous expectations. Even before the conflict began, the OBR had downgraded its growth forecast for this year from 1.4% to 1.1% in its recent spring statement.
Ms Reeves stated: "Our economic plan is the right one, but I know there is more to do. In an uncertain world, we are building a stronger and more secure economy by cutting the cost of living, cutting national debt and creating the conditions for growth to make all parts of the country better off."
Interest Rate and Stagflation Concerns
Experts suggest that Bank of England policymakers are likely to delay interest rate cuts at their upcoming meeting, despite the UK's tepid economic performance in recent months. Barret Kupelian, chief economist at PwC, noted that the January data does not yet reflect spillovers from Middle East tensions through energy prices, trade, or financial markets.
He explained: "In calmer conditions, soft growth and a steady fiscal stance would strengthen the case for rate cuts. But central banks do not ease into a fog of geopolitical uncertainty. The case for lower rates is there domestically, but geopolitics may yet delay the verdict."
Lenders have already begun withdrawing mortgage deals in anticipation of prolonged higher interest rates. Some analysts even forecast that the Bank may need to raise rates further if inflation surges due to the war.
Risk of Stagflation or Recession
Thomas Pugh, chief economist at RSM UK, warned that the Middle East crisis raises the spectre of stagflation—a toxic mix of rising inflation and stagnant economic growth—or even a recession if prices continue to soar. He said: "If energy prices stay around current levels, another bout of stagflation looks likely, with growth slipping to around 0.5% this year. If energy prices move even higher, in a similar way to 2022 a recession looks more likely, given the weaker labour market and tighter starting point for monetary and fiscal policy."
The combination of flatlining growth, inflationary pressures from geopolitical conflicts, and cautious monetary policy underscores the fragile state of the UK economy as it navigates a complex and volatile global landscape.
