UK Economy Contracts in January, Weighing on Sterling

UK Economy Contracts in January, Weighing on Sterling

Friday 14th March 2025 – 09:22 (GMT)

The UK economy shrank by 0.1% in January, reversing some of the momentum gained in December when GDP grew by 0.4%. The latest figures, which defied market expectations of a small expansion, highlight the fragility of Britain’s economic recovery and add to concerns over the country’s growth trajectory in early 2025.

The downturn was driven primarily by weakness in the industrial sector, with manufacturing output slipping 1.1%. Basic metals and pharmaceuticals were among the hardest hit, declining 3.3% and 3.1%, respectively. Mining and quarrying activity also contracted sharply, reflecting a 3.7% drop in oil and gas extraction. Meanwhile, construction output fell for a second consecutive month, dipping 0.2%.

The services sector, which accounts for the bulk of UK economic activity, provided some relief, eking out a 0.1% gain. Growth was supported by administrative and support services as well as wholesale and retail trade, though this was not enough to offset broader industrial weakness.

Over the three months to January, the UK economy managed a modest 0.2% expansion, suggesting that while growth remains positive in the medium term, underlying economic pressures persist.

The weaker-than-expected data is likely to weigh on the pound, as investors reassess the outlook for UK interest rates. A sluggish economy could strengthen the case for the Bank of England to consider rate cuts later in the year, particularly if inflation pressures ease further. The currency may also come under pressure if markets see the latest figures as a sign that Britain’s post-pandemic recovery remains uneven, with industrial sectors particularly vulnerable to global headwinds.