The UK economy unexpectedly flatlined in January, stoking concerns over growth amid the global energy price shock triggered by the US-Israel war on Iran.
Figures from the Office for National Statistics (ONS) showed 0% growth in gross domestic product (GDP), down from an increase of 0.1% in December, as the economy failed to recover from uncertainty surrounding the chancellor Rachel Reeves’s autumn budget.
Falling significantly short of City predictions for growth of 0.2%, the figures came as the UK and other countries faced a potentially severe economic hit as the Middle East conflict drove up oil and gas prices, hitting consumers with higher living costs.
The pound fell against the US dollar after the figures were released.
In a fresh blow to the Labour government’s growth ambitions after a challenging start to the year, output in the service sector flatlined amid falls in recruitmentactivity and the hospitality sector.
Unemployment in the UK has risen to the highest level in five years in recent months, with businesses complaining that employer tax increases and a rising national living wage are hitting jobs. Hiring has fallen most in sectors such as hospitality and retail.
The ONS said the fall in employment activities was the largest negative contribution from a single industry to monthly GDP. The next largest was accommodation and food service activities, with food and beverage services falling by 2.7% as fewer people ate out in restaurants, pubs and cafes.
The production sector – which includes manufacturing, mining, and energy generation – fell by 0.1% on the month, while the construction industry grew by 0.2%.
Analysts said it was possible the economy had been held back in January by the effects of Storm Goretti and water supply outages in Kent that forced some businesses to close.
Over the broader three months to the end of January, growth rose by 0.2%.
Paul Dales, chief UK economist at the consultancy Capital Economics, said: “With GDP not rising at all in January, it is clear the economy was subdued even before the leap in energy prices triggered by the Middle East conflict.
“We previously thought GDP growth would be 1% this year, but under various scenarios for the length and severity of the jump in energy prices, it could be either 0.6%, 0.4% or 0.1% instead.”
Oil prices continued to trade above $100 a barrel on Friday, as widespread Iranian attacks on energy facilities across the region overshadowed a vast release of government reserves. The price of crude has surged by more than a quarter since the start of the conflict a fortnight ago.
Analysts said that if sustained, higher energy prices would drive up inflation, dashing hopes of an interest rate cut from the Bank of England next week. Financial markets anticipate Threadneedle Street could be forced to increase borrowing costs this year or in 2027.
Against an increasingly volatile backdrop, Reeves is expected to use a speech early next week to spell out Labour’s plan for the economy amid growing calls for an emergency energy support package.
Responding to the GDP figures, the chancellor said: “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.”
Experts said sharply rising living costs, alongside heightened geopolitical uncertainty, would damage consumer spending and business confidence, with the potential to trigger a recession if the conflict was sustained.
The UK economy grew by 1.3% in 2025, an improvement on growth of 1.1% in 2024, although worse than official forecasts of 1.5% amid uncertainty over tax increases and the health of the public finances.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “Our expectations for a strong start to the year have diminished. And with the Iran conflict bubbling in the background, further headwinds will drag UK growth lower.
“With energy prices rapidly rising, higher oil and gas prices will squeeze real disposable incomes, constraining spending and investment. Hiring plans will probably be shelved, too. And higher uncertainty will dampen animal spirits.”
