The UK economy unexpectedly stalled in January, raising concerns about the country’s ability to withstand a sharp rise in energy prices triggered by the escalating conflict in the Middle East.
Data released by the Office for National Statistics showed that gross domestic product remained flat in January, with 0% growth, compared with December, when the economy had expanded by 0.1%.
The result fell well below City forecasts of 0.2% growth and comes at a time when policymakers are grappling with growing uncertainty about the economic impact of rising energy costs and global geopolitical tensions.
The figures have intensified fears among economists that a sustained rise in energy costs could push inflation higher and potentially drive the UK economy into recession later this year.
The weak performance also marks a setback for the Labour government’s growth agenda after a challenging start to the year.
Following the release of the figures, the pound weakened against the US dollar, reflecting investor concerns about the strength of the UK economy.
Services sector slowdown drags on growth
The services sector, which accounts for the largest share of Britain’s economy, was a key driver behind the stagnation.
Activity across services industries showed little growth during the month, with declines recorded in recruitment and hospitality-related activities.
Employment services recorded the largest negative contribution to monthly GDP among all industries, according to the statistics agency.
Economists said the slowdown partly reflects the impact of tighter monetary and fiscal policies introduced to contain inflation and stabilise public finances.
Tomasz Wieladek, chief European macroeconomist at investment management firm T. Rowe Price, said demand across the economy has been under pressure even before the latest surge in energy prices.
“The weakness was driven by services, the main part of the UK economy, and can be partially explained by tight monetary policy and the fiscal policy consolidation the UK is currently experiencing,” he said.
Both policies, he said, were reducing economic demand, while structural changes such as the growing use of AI could also be dampening hiring in services industries.
“If AI reduces hiring in the services sector, it can lead to higher unemployment and softer demand,” he said, adding that the UK economy had already been weak before the recent oil shock.
Hospitality and retail face pressure
Within the services sector, accommodation and food services experienced notable declines.
Food and beverage services fell by 2.7 percent during the month as fewer consumers visited restaurants, pubs and cafes amid rising living costs.
Businesses in sectors such as hospitality and retail have also been reporting slower hiring in recent months.
Unemployment has risen to its highest level in five years, with companies citing higher employer taxes and increases in the national living wage as factors weighing on job creation.
Analysts said external factors may also have contributed to the weak economic performance in January.
Severe weather conditions linked to Storm Goretti and water supply outages in parts of Kent forced some businesses to temporarily close, potentially dampening economic activity during the month.
Manufacturing slips while construction grows
Other sectors of the economy showed mixed results.
The production sector, which includes manufacturing, mining and energy generation, declined by 0.1% during the month.
In contrast, the construction industry recorded modest growth of 0.2%.
Over the three months to the end of January, overall economic growth was slightly stronger, expanding by 0.2%.
However, economists said the latest monthly data suggests the economy remains vulnerable to external shocks.
Oil price surge clouds outlook
The fragile growth outlook has become more concerning following a sharp increase in global energy prices triggered by the ongoing conflict in the Middle East.
Oil prices have risen above $100 per barrel after Iranian attacks on energy facilities across the region heightened fears of supply disruptions.
Crude prices have climbed by more than 25% since the conflict escalated two weeks ago.
Economists warn that sustained high energy prices could significantly raise inflation and erode consumer spending power.
“The war in the Middle East and the consequent oil price rise will raise inflation and reduce consumer spending,” Wieladek said.
He added that tightening financial conditions in bond markets could further amplify the economic slowdown.
“Given the UK’s already weak growth performance among advanced economies, the oil shock could push the economy into recession, raising unemployment and reducing GDP. Stagflation is just around the corner,” he said.
Inflation risks could delay interest rate cuts
Higher energy costs could also complicate monetary policy decisions for the Bank of England.
Economists had previously expected the central bank to begin cutting interest rates later this year, but rising inflation risks could delay that timetable.
Consultancy Oxford Economics estimates that if oil prices climb to $140 per barrel, UK inflation could exceed 5% by the final quarter of 2026.
Such a scenario could force the Bank of England to raise borrowing costs again and potentially push the economy into a mild recession.
Andrew Goodwin, chief UK economist at Oxford Economics, said the outlook depends heavily on how the Middle East conflict evolves.
The firm has developed two possible scenarios: one in which oil averages about $100 per barrel and another in which prices surge to $140 per barrel alongside a sharp increase in gas prices.
“In both scenarios, the main transmission channel to the economy is through higher inflation,” Goodwin said.
Rising petrol prices and higher household energy bills could quickly feed through to consumers.
Daily data from motoring organisation RAC already suggests petrol prices have risen sharply over the past two weeks.
Domestic energy bills are also expected to increase significantly in July when the next revision of the UK’s energy price cap takes effect.
Economists say the combination of weak growth, rising inflation and tightening financial conditions could present policymakers with a difficult balancing act in the months ahead.
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