Britain’s Economy Unexpectedly Stalled at Start of the Year

Vehicle manufacturing in Sunderland, UK. Photographer: Ian Forsyth/Bloomberg Photo by Ian Forsyth /Bloomberg

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(Bloomberg) — The UK economy unexpectedly failed to grow in January, suggesting activity was stalling even before conflict in the Middle East threatened to deliver a fresh blow to consumers and businesses.

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Gross domestic product was unchanged after 0.1% growth in the previous month, the Office for National Statistics said on Friday. It was worse than the 0.2% growth economists had expected and below all the forecasts in the survey.

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The powerhouse services sector stagnated as a weakening labor market hit recruiters. Manufacturing grew just 0.1% and construction expanded 0.2%, suggesting the economy was already off track to achieve the 0.3% expansion forecast by the Bank of England for the first quarter as a whole. 

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However, that forecast, along with the rest of 2026, has been called into question by the turmoil triggered by the US and Israeli attack on Iran on Feb. 28. 

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“The UK economy entered 2026 with little forward momentum, and whether growth strengthens or stalls may depend more on geopolitics than on domestic fundamentals,” said Martin Beck, chief economist at WPI Strategy.

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The pound extended its drop against the dollar, falling 0.5% to $1.3280 amid broad support for the greenback. Market bets on BOE policy were largely unchanged with traders seeing a hike as the most likely next move. 

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The data suggested the Labour government is still struggling to get growth motoring and headwinds have only grown in recent weeks. Oil rose above $100 a barrel once again on Thursday amid the worst supply disruption in the history of the global oil market. British households and firms could be hit by another inflationary shock that hits spending and forces the UK central bank to delay interest-rate cuts.

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The effects of the war are already feeding through to consumers with petrol prices climbing by the most since 2022 and lenders hiking mortgage rates. 

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Under normal circumstances, Friday’s figures would support the BOE easing the pressure on borrowers on Thursday but it is now expected to skip a rate reduction. Only a few weeks ago, another quarter-point cut was seen as highly likely as policymakers responded to a weakening labor market.

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The ONS said employment activities were the biggest drag on overall growth and the services sector in January, a possible sign that recruiters were struggling amid a weak labor market. The sector suffered its biggest monthly drop in output since 2012 outside the pandemic. The hospitality sector was the next biggest downward contribution on the sector, while a 5.6% drop in private housebuilding — the largest decline since the pandemic — also weighed on the figures.

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A relatively benign outlook for the UK economy has been upended by the war with economists seeing the length of the disruption to oil and gas supplies as key to the strength of any inflationary surge.