UK economy shrinks as GDP falls by 0.1% – what it means for your money
BRITAIN’S economy fell 0.1% in January, caused by a decrease in the production sector, according to official figures.
The latest figures from the Office for National Statistics (ONS) reveal Gross Domestic Product (GDP) fell marginally in January.
Most economists had forecast gross domestic product (GDP) to rise by 0.1% in the first month of the year.
GDP grew by 0.4% in December, which was better than analysts expected and marked a pick up following a 0.1% rise in November and 0.1% fall in October.
Real GDP is expected to have grown by 0.2% in the three months to January 2025, compared with the three months to October 2024.
This was mainly driven by growth in the services sector, which rose by 0.1% in January.
Meanwhile, the production sector shrank by 0.9% in January, while construction output fell by 0.2%.
GDP is one of the main indicators used to measure the performance of a country’s economy.
When it goes up, it means the economy is doing well, when it falls it means the economy has shrunk.
Liz McKeown, Director of Economic Statistics at the ONS, said the overall economic picture continues “to be of weak growth”.
She said: “The economy shrank a little in January but grew in the latest three months as a whole.
“The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.”
But she added that services and retail saw strong performance in the first month of the year.
She said: “Services continued to grow in January led by a strong month for retail, especially food stores, as people at and drank at home more.”
Mel Stride MP, Shadow Chancellor of the Exchequer, said the figures show this government is a “growth killer”.
She said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024.
“After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation this government is a growth killer.
“Labour inherited the fastest growing economy in the G7 but since they arrived business confidence has collapsed and jobs are being lost.”
She added that the Chancellor has just a fortnight until the Spring Statement and must rethink her policies.
She said: “The Chancellor has 12-days until her emergency Budget – she must think again or hardworking people will continue to pay the price of a Labour government without any business experience.”
But Chancellor Rachel Reeves has pushed back at the claims and said she will restart economic growth.
She said: “The world has changed and across the globe we are feeling the consequences.
What is the base rate and how does it affect the economy?
NINE members of the Bank of England's Monetary Policy Committee meet eight times each year to set the base rate.
Any change to the Bank’s rate can have wide-reaching consequences as it directly influences both:
- The cost that lenders charge people to borrow money
- The amount of savings interest banks pay out to customers.
When the Bank of England lowers interest rates, consumers tend to increase spending.
This can directly affect the country’s GDP and help steer the economy into growth and out of a recession.
In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages.
But those with savings tend to lose out.
However, when more credit is available to consumers, demand can increase, and prices tend to rise.
And if the inflation rate rises substantially – the Bank of England might increase interest rates to bring prices back down.
When the cost of borrowing rises – consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices.
The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target.
In this scenario, the losers are those with debt.
First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately.
Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower – but their bills could drastically increase when it’s time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises.
However, the winners in this scenario are those with money to save.
Banks tend to battle it out by offering market-leading saving rates when the base rate is high.
“That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our Plan for Change.
“And why we are launching the biggest sustained increase in defence spending since the Cold War, fundamentally reshaping the British state to deliver for working people and their families; and taking on the blockers to get Britain building again.”
All eyes will be on the Bank of England as it decides whether to cut interest rates next week.
Experts suggest the Bank’s Monetary Policy Committee will hold interest rates at 4.5% when it meets on March 20.
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