Britain’s economy unexpectedly stagnated in January, official data showed on Friday, revealing a loss of momentum even before the ongoing war in Iran threatens to further strain growth and energy markets.
The Office for National Statistics reported that gross domestic product (GDP) was essentially flat since June, despite government pledges by Prime Minister Keir Starmer and Finance Minister Rachel Reeves to accelerate economic growth. January GDP recorded zero growth, falling short of the 0.2% month-on-month increase forecast in a Reuters poll of economists. Over the three months to January, GDP rose 0.2%, slightly below expectations of 0.3%.
The figures showed no growth in the dominant services sector, while modest increases were seen in manufacturing and construction. Sterling weakened against the U.S. dollar following the release.
Economists warn that the U.K. is more vulnerable than many other Western economies to energy price shocks due to heavy reliance on imported gas and constrained public finances, which may limit government support for households and businesses. British government bond prices have fallen sharply since the outbreak of the U.S.-Israeli war in Iran.
“This is a worrying start to the quarter, given that the early-year improvement in business confidence is likely to be short-lived,” said Fergus Jimenez-England, associate economist at the National Institute of Economic and Social Research.
Despite the weak GDP, investors are now pricing in an 86% chance of a Bank of England interest rate hike by the end of 2026, reflecting concerns over rising inflation rather than expectations for rate cuts.
Brent crude futures surged above $100 per barrel on Friday, marking roughly a 9% weekly increase, intensifying pressure on the economy. Jimenez-England added: “We expect the impact on growth in the first quarter to be limited, but if energy prices remain elevated for the rest of the year, it could reduce GDP growth by around 0.2 percentage points in 2026.”
The Bank of England had previously projected 0.3% GDP growth in Q1 and 0.9% for 2026 before the Iran conflict began. Finance Minister Reeves noted it was too early to assess the full impact of rising energy costs.
“With the Middle East conflict adding to private sector challenges, reliance on the public sector to drive growth has increased,” said Andrew Goodwin, chief UK economist at Oxford Economics. “The longer oil and gas prices remain high, the more pressure there will be on the chancellor to offer fiscal support.”