UK economy slows sharply in January [Video]

As excuses go it's an easy one to make, but for Chancellor of the Exchequer Rachel Reeves to suggest that today's disappointing monthly GDP numbers are down to events overseas is disingenuous in the extreme.

It is true that the world has changed due to events across the Atlantic, as our new friend in the White House upends the global order with his threats of trade disruptions and higher tariffs, but a lot of the problems the UK is facing are mostly home grown, and one need look no further than our current politicians.

Since the widely criticised October budget, and the briefings that led up to it the UK economy has flatlined, while the US economy has continued to grow albeit more slowly than the first six months of 2024.

In that time businesses have continued to warn, in vain so far, that the new measures announced by the Chancellor will guarantee a slowdown in 2025.

Over the same period the government’s fiscal headroom has disappeared and having boxed herself into a corner of her own making could well be tempted to raise taxes further, as if taxing businesses more will help bring in more income.  

Nonetheless blaming someone else is always helpful when it comes to diverting blame from your own failings, it’s the oldest trick in the book for politicians, the sad thing is so many people fall for it.  

In any case let’s have a look at today’s numbers for January GDP which saw the economy shrink by -0.1%, after a strong December print of 0.4%, which surprised to the upside and was driven mainly by increased government spending.

It is true that these numbers are incredibly volatile so should always be treated with caution, but nonetheless when looked at over a longer period they still don’t make for encouraging reading.

This slowed to 0.1% in January, with the biggest slowdown coming in accommodation and food services, which fell 2.4% after growth of 0.9% in December. In a sign of shifting consumer spending patterns, food store sales grew while spending in pubs and restaurants fell by 2.1%.

We also saw sharp slowdowns in production output which fell by 0.9%, with mining and quarrying showing a sharp decline of 3.3% as crude oil and natural gas extraction contracted by 3.7%.

This area of the UK economy is unlikely to improve given the government’s current energy policy, towards oil and gas, which is deliberately being wound down in what can only be described as a deliberate policy of economic self-harm, and absolutely nothing to do with global events.  

Manufacturing output also fell 1.1%, led by declines in the manufacture of base metals and metal products, as well as the manufacture of basic pharmaceutical products and preparations, all of which are beholden to rising energy prices.

One of the more notable trends over the past few months has been a slowdown in the manufacture of new motor vehicles and trailers as carmakers face a perfect storm of not only trade uncertainty and high energy costs, but government mandated net zero targets that they have little hope of meeting.  

None of the above has anything to do with President Trump, in fact US energy policy is geared towards driving prices lower, and not higher so Reeves' argument unravels a little here.

The outlook going forward is no less rosy with a report in Bloomberg earlier this week showing that UK consumers face an average £600 a year rise in costs from April in the form of higher prices from the likes of broadband, council tax, transport, water and energy to name but a few, and that’s before the impact of various tax thresholds kicks in as well.  

There's also the small matter of UK government borrowing costs which had until recently been moving in line with US treasuries.

At their peaks in January the US 5-year yield was sitting at 4.61%, while the equivalent UK 5-year gilt was at the same level. Fast forward to now and the US 5-year yield briefly fell below 4% at the start of the month before rebounding to current levels of 4.07%.

The UK 5-year gilt on the other hand, after initially falling in sync with its US counterpart, has subsequently surged back above 4.3%.

While it’s very easy to blame the US President for that, there is also plenty of blame to go around when it comes to previous government policy when it comes to spending on defence, which was allowed to wither on the vine.

The government is now faced with an unenviable choice, having already raised taxes by a record amount in April or being forced to slash public spending or raise taxes further.

Given that her April tax rises forced the private sector to hunker down, with the Bank of England warning of job losses and higher inflation it would be foolhardy in the extreme to add on to that tax burden, which leaves public spending.

While some economists insist that the UK can avoid a prolonged slowdown, I’m not so sure unless this government suddenly discovers some pro-business credentials that we didn’t know they had.

As for Reeves, she’ll need to keep dusting off the cover of that excuse book as she’ll likely need it in the weeks and months ahead, as the markets prepare for the latest OBR forecasts and the Spring Statement on 24th March.