People visit a lookout point in Greenwich Park, with the Canary Wharf financial district in the distance, during sunny weather but cold weather in London, U.K., on Jan. 2, 2026.
Henry Nicholls | Afp | Getty Images
The U.K. economy flatlined in January as growth continued to slow even before the U.S.-Iran war brought about a global energy price shock.
Preliminary figures published on Friday fell short of the 0.2% month-on-month gross domestic product growth forecast by economists polled by Reuters. The economy grew by 0.1% in December.
In the final quarter of 2025, the U.K. economy grew by a weaker-than-expected 0.1%.
Britain's Office for National Statistics said the dominant services sector showed no growth in January, while production contracted by 0.1% and construction grew by 0.2%.
In her annual Spring Statement delivered earlier this month, U.K. Finance Minister Rachel Reeves touted growth as a sign of the government having "the right economic plan for the country."
However, fresh figures show evidence of a lackluster British economy, which is now under further strain following the outbreak of the U.S.-Iran war.
The conflict has sparked a rally in oil and gas prices, driving concerns about the inflation outlook for energy importers like the U.K. and prompting market watchers to reassess the likelihood of an interest cut from the Bank of England later this month.
In the U.K., mortgage rates have risen amid the escalating conflict, while government borrowing costs have seen wild swings.
As of Friday morning, markets are now pricing in just a 1.83% chance of a rate cut from the central bank on March 19, according to LSEG data.
U.K. government bonds, known as gilts, were little changed across most of the curve following Friday's data release. Short-term 2-year gilt yields fell by 3 basis points.
The British pound fell by 0.4% against the U.S. dollar and was flat against the euro.
In a note following the GDP update, Deutsche Bank's Chief UK Economist Sanjay Raja said the report "was not what the doctor ordered."
"We, alongside others, expected the UK economy to bounce back strongly after a tepid end to 2025," he 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."
Rapidly rising energy prices will squeeze real disposable incomes, Raja said, constraining spending, investment and corporate hiring plans.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said any remaining hopes of an impending BoE rate cut had been "extinguished," despite a stalling U.K. economy.
"The Middle East conflict means that any lingering momentum in the economy has evaporated by now with the energy crisis and supply chain disruption pushing both the U.K. closer to stagflation and eroding the Chancellor's fiscal headroom," he said.
"While these disappointing figures will increase fears over the health of the economy, there is almost no hope of an interest rate cut next week given that rate-setters will be deeply concerned by the torrent of new inflation risks caused by the conflict."
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