UK Economy Unexpectedly Shrinks Ahead of Spring Statement

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UK Economy Unexpectedly Shrinks Ahead of Spring Statement

This morning, figures from the ONS indicated that UK GDP contracted by 0.1% on a monthly basis over the course of January, renewing concerns over the health of the UK economy as markets wait for the Chancellor’s Spring statement set for 26th March.

The unexpected shrinking of the UK economy further raises concerns over the trajectory of UK growth, with fears growing over the extent to which dampened consumer and business confidence, in light of fiscal tightening measures and a cost-of-living crisis, could impact growth moving forward.

The lack of UK growth also represents a major headwind for the Chancellor’s fiscal plans, as commentators expect to see the OBR announce that No.11’s fiscal headroom has been all but wiped out. During the Autumn Statement, Reeves signalled that the budget had left No.11 with ￡9.9bn worth of fiscal headroom; however, the rise in borrowing costs, lack of growth, and rise in other spending commitments have likely left the government with a fiscal pain-in-the-neck.

Going into the statement, the Treasury now has three options, generally speaking. Firstly, the Treasury could cut public spending; secondly, they could increase taxes; or thirdly, they could change their borrowing rules (likely leading to a further hit to the UK’s fiscal credibility, which in turn will increase borrowing costs and exacerbate the very issue they’re faced with).

The shrinking of the economy came against expectations of a 0.1% rise in output and follows the 0.4% growth seen during December. This represents the lowest level of growth since October and marks the sixth contractionary monthly print over the last twelve months.

The economic contraction over January was led by a fall in output from the UK’s production sector, which eased by 0.9%, alongside a 1.1% fall in manufacturing. Meanwhile, construction also fell by 0.2%.

There was some marginally good news for the UK service sector, which saw a 0.1% rise as a whole in January, on the back end of a 0.4% rise in December. Here, the ONS noted that of the 14 subsectors, output increased in six, while seven subsectors saw a decline and one showed no growth across the month.

This morning’s monthly print follows the 0.1% quarterly growth recorded over Q4, which itself came on the back end of the stagnant growth seen over Q3.