The economy showed no growth in January, according to the Office for National Statistics (ONS). The ongoing Middle East crisis has driven up energy prices, raising inflation concerns and diminishing hopes for an interest rate cut from the Bank of England. Chancellor Rachel Reeves is expected to outline Labour’s economic strategy amid calls for an emergency energy support package. Experts warn that rising living costs and geopolitical uncertainty could harm consumer spending and business confidence.

Services output stagnated, manufacturing grew only slightly, and construction posted modest gains.

ONS Director of Economic Statistics, Liz McKeown said “Growth ticked up slightly in the latest three months, partly reflecting the recovery of car manufacturing, following the cyber incident in the Autumn. Within services, which also increased, wholesale continued to rebound from a weak summer. However, the overall picture remains subdued, with no growth in the latest month.

“There was another large fall in the construction industry in the latest three months, with continued contraction in housebuilding.”

Anna Leach, Chief Economist at the Institute of Directors, said “GDP was flat in January, marking a disappointing start to the year. Within services, employment services had a particularly weak month, as a sharp decline in hiring took its toll on the recruitment sector – activity is now down 8% on January 2024. Although consumer services edged up on the month, they were flat on the quarter as confidence to spend remains weak. And while manufacturing continued to recover from the impact of the cyber-attack on JLR last year, auto output is still lower than a year ago, close to 10% down on January 2024. Meanwhile, construction activity remains very weak as regulatory delays and depressed demand continue to drag on housebuilding.

“The outbreak of conflict in the Middle East hits an already troublingly fragile UK economy and sharpens the action needed to lift growth prospects. Energy prices have already risen sharply, and unprecedented damage to supply capacity in the Middle East will have uncertain effects on energy prices longer term. This risks driving up costs for businesses and consumers at a point when inflation was only just heading back to target, and could cause a further slump in confidence and impetus to spend. It is right that the government stands ready to intervene and support the economy once again. But short-term agility must not distract from the UK’s longer term growth needs. From an energy strategy which takes a realistic approach to the transition to net zero, to workers’ rights that avoid overburdening employers, a laser focus on growth is urgently needed.”

Suren Thiru, ICAEW Chief Economist, said “These figures confirm that the economy was treading water even before the significant economic shock unleashed by the Middle East conflict took hold, as weak services and industrial activity helped suffocate overall output in January.

“The UK economy could well have returned to modest growth in February, aided by a stronger manufacturing and services output, particularly with activity in the month almost entirely pre-dating the current turmoil.

“The Middle East conflict means that any lingering momentum in the economy has evaporated by now with the energy crisis and supply chain disruption pushing both the UK closer to stagflation and eroding the Chancellor’s fiscal headroom.

“While these disappointing figures will increase fears over the health of the economy, there is almost no hope of an interest rate cut given that rate-setters will be deeply concerned by the torrent of new inflation risks caused by the conflict.

“Though talk of rate rises is premature as policymakers will likely look through the immediate impact of surging energy prices, interest rate cuts will probably remain off the table until the Autumn at the earliest, even if a swift resolution to the crisis is found.”

Alpesh Paleja, Deputy Chief Economist, CBI, said “While the economy managed to eke out modest growth in the three months to January, underlying momentum remained weak. The broader picture is still one of an economy treading water since the middle of last year.

“However, this data is already backward-looking. The near-term outlook is now dominated by heightened uncertainty surrounding conflict in the Middle East. Energy prices have risen sharply and, if sustained, will only intensify the by now familiar mix of high inflation and weak growth.

“Oil and gas price shocks risk placing renewed strain on businesses and households, and government will need to respond with agility to the evolving conflict. With firms already squeezed by high industrial energy costs, this moment reinforces the need to cut the cost of doing business – including finding appropriate landing zones for the Employment Rights Act and simplifying the tax system to support growth.”

Source: Credit Connect