The UK economy faltered at the start of the year as households cut back on consumer spending and restaurants and food services saw a sharp decline in activity.
New figures from the Office for National Statistics (ONS) show gross domestic product (GDP) recorded zero growth in January, falling short of economists’ expectations and marking a slowdown from modest 0.1% growth in December. Analysts had forecast production would rise about 0.2% during the month.
The disappointing performance highlights the fragile state of the UK economy even before the latest geopolitical shock from the escalating US-Israeli conflict with Iran, which economists say could further dampen growth by driving up energy prices and fueling inflation.
The ONS said the overall economic picture remained “subdued”, with consumer-facing sectors particularly weak. In the dominant services sector, which accounts for around 80% of UK economic activity, there was a notable 2.7% decline in food and drink services as households cut back on non-restaurant spending.
This decline in the hospitality sector suggests that pressure on household finances continues to weigh heavily on consumer behavior. Restaurants and pubs are often among the first sectors to feel the impact as consumers begin to cut their budgets.
In general, the services sector overall reported no growth over the month, underscoring the cautious corporate spending environment.
Other sectors of the economy also delivered mixed results. Industrial production fell 0.1% in January, while construction activity provided one of the few bright spots, rising 0.2% over the month.
The flat reading follows a period of weakening economic momentum in the second half of 2025, when uncertainty over tax changes, rising unemployment and continued pressure on the cost of living led many consumers to reduce spending.
Although monthly GDP numbers were flat, three-month measures of economic activity, which are typically less volatile, suggested modest growth. In the three months to January, the UK economy grew by 0.2%, slightly stronger than the 0.1% in the previous three-month period.
But economists say the underlying picture remains weak, particularly as global developments threaten to exacerbate inflation and further slow economic activity.
The latest data was compiled before the outbreak of hostilities between the United States, Israel and Iran, which has led to a significant increase in global energy prices. Oil prices have soared and wholesale gas markets have become increasingly volatile, raising concerns about renewed pressure on the cost of living for British households.
Prime Minister Sir Keir Starmer warned earlier this week that the longer the Middle East conflict lasts, the more likely it is to have a noticeable impact on the UK economy.
Higher energy prices are already impacting petrol and diesel costs, while households falling below Ofgem’s energy price cap will be spared immediate increases until the next adjustment period in July.
Nevertheless, economists warn that continued increases in energy prices could quickly push inflation back up. Before the conflict broke out, it was expected that inflation would fall to the Bank of England’s target of 2% by the spring. A renewed increase in energy costs could negate this course.
The shift in the inflation outlook is already having an impact on financial markets. Expectations that the Bank of England would begin cutting interest rates as early as March have largely dissipated, and economists now widely expect policymakers to keep interest rates steady at their meeting next week.
This change in interest rate expectations had an immediate impact on the mortgage market. Hundreds of mortgage contracts have been canceled by lenders in recent days, while average mortgage rates have risen to levels not seen since last spring.
If geopolitical tensions continue, higher borrowing costs and weaker consumer confidence could undermine Labor’s key economic priority of accelerating growth, analysts said.
Chancellor Rachel Reeves acknowledged the challenges facing the economy and said the government remained committed to its long-term economic strategy.
“Our economic plan is right, but I know there is more to do,” she said.
“In an uncertain world, we are building a stronger, safer economy by lowering the cost of living, reducing national debt and creating the conditions for growth so that all parts of the country can thrive.”
Opposition members were quick to criticize the government’s economic performance. Shadow Chancellor Sir Mel Stride said Labor had left the economy exposed to external shocks.
“Labour’s economic mismanagement has left the UK vulnerable to the potential consequences of the Iran conflict,” he said.
“They must take urgent action now, including cutting the fuel tax, supporting oil and gas production in the North Sea and putting forward a credible plan to reduce the deficit and lower the power bill.”
Looking ahead, economists expect growth to remain subdued for much of the year.
The Office for Budget Responsibility recently cut its forecast for UK economic growth in 2026 to 1.1% from its previous estimate of 1.4%.
Yael Selfin, chief economist at KPMG UK, said the latest GDP figures suggested the economy started the year on a weak footing and could struggle to regain momentum.
“The UK economy has made a weak start to the year and activity is expected to slow further amid soaring energy prices,” she said.
Selfin added that the government’s borrowing costs have risen in recent weeks as financial markets reassess the outlook for interest rates. Higher borrowing costs could have a negative impact on both businesses and households.
“Given expectations of weaker growth coupled with rising costs, companies are likely to scale back their investment plans,” she said.
The challenge for policymakers now is to navigate a fragile domestic economy while responding to external shocks that threaten to drive up inflation and delay any relief from increased interest rates.
