The UK economy failed to show any growth in January, as the global energy shock triggered by the war in Iran began to take its toll on domestic output. The 0% GDP figure was a disappointment for the Treasury, which had hoped for a 0.2% rise to start the year. This stagnation reflects a broader sense of unease among both consumers and businesses, as the prospect of “higher-for-longer” inflation and interest rates returns to the forefront.
The services sector was the primary drag on the economy, with recruitment and hospitality performing poorly. The ONS noted that employment activities saw a sharp decline, contributing significantly to the lack of growth. Business leaders have cited the recent autumn budget and its associated tax hikes as a deterrent to expansion, leading to the highest unemployment levels the UK has seen in half a decade.
Externally, the situation is even more volatile, with crude oil prices jumping more than 25% in the last two weeks. Iranian attacks on energy infrastructure have overshadowed international efforts to stabilize the market through reserve releases. This has led to a direct increase in living costs for UK households, further dampening consumer spending and causing a notable decline in the restaurant and beverage industries.
Economists are now warning that the UK’s 2026 growth could be significantly lower than the 1.3% achieved in 2025. Deutsche Bank suggested that the “Iran conflict bubbling in the background” is creating a “headwind” that will constrain both investment and consumer spirits. If energy prices do not stabilize soon, the likelihood of the Bank of England lowering borrowing costs in the near future appears slim.
Chancellor Rachel Reeves acknowledged the “uncertain world” in her response to the ONS figures but insisted that the current economic plan is the correct path. She is under pressure to provide a more robust response to the energy crisis, with a major policy speech expected next week. The market will be watching closely for any signs of an emergency support package that could help prevent the economy from slipping into a recession.