The UK economy stalled at the start of the year as households cut back on discretionary spending, with restaurants and food services experiencing a sharp decline in activity.
New figures from the Office for National Statistics (ONS) show that gross domestic product (GDP) recorded zero growth in January, falling short of economists’ expectations and marking a slowdown from the modest 0.1% growth recorded in December. Analysts had forecast that output would expand by around 0.2% over 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 warn could further dampen growth by pushing energy prices higher and fuelling inflation.
The ONS said the overall economic picture remained “subdued”, with consumer-facing sectors particularly weak. Within the dominant services sector, which accounts for around 80% of UK economic activity, there was a notable 2.7% drop in food and drink service activity as households curtailed spending on eating out.
This contraction in hospitality suggests that the pressure on household finances continues to weigh heavily on consumer behaviour. Restaurants and pubs are often among the first sectors to feel the impact when consumers begin tightening their budgets.
More broadly, the services sector showed no growth overall during the month, underscoring the cautious spending environment facing businesses.
Other parts of the economy also delivered mixed results. Industrial production slipped by 0.1% during January, while construction activity provided one of the few bright spots, expanding by 0.2% over the month.
The flat reading follows a period of slowing economic momentum during the second half of 2025, when uncertainty over tax changes, rising unemployment and lingering cost-of-living pressures led many consumers to reduce spending.
Although the monthly GDP figure showed stagnation, the three-month measure of economic activity, which is typically less volatile, indicated modest growth. In the three months to January, the UK economy expanded by 0.2%, slightly stronger than the 0.1% recorded in the previous three-month period.
However, economists say the underlying picture remains weak, particularly as global developments threaten to worsen inflation and slow economic activity further.
The latest data was compiled before the outbreak of hostilities involving the United States, Israel and Iran, which has sent global energy prices sharply higher. Oil prices have surged and wholesale gas markets have become increasingly volatile, raising concerns about a renewed cost-of-living squeeze for British households.
Prime Minister Sir Keir Starmer warned earlier this week that the longer the Middle East conflict continues, the more likely it is to have a tangible impact on the UK economy.
Higher energy prices are already feeding through to petrol and diesel costs, while households covered by Ofgem’s energy price cap will remain shielded from immediate increases until the next adjustment period in July.
Nonetheless, economists warn that sustained energy price rises could quickly push inflation higher again. Before the conflict erupted, inflation had been expected to fall to the Bank of England’s 2% target by the spring. A renewed surge in energy costs could derail that trajectory.
The shift in the inflation outlook has already affected financial markets. Expectations that the Bank of England would begin cutting interest rates as early as March have largely evaporated, with economists now widely anticipating that policymakers will hold rates steady when they meet next week.
This change in interest rate expectations has had an immediate impact on the mortgage market. Hundreds of mortgage deals have been withdrawn by lenders in recent days, while average mortgage rates have climbed back to levels not seen since last spring.
If the geopolitical tensions persist, analysts say higher borrowing costs and weaker consumer confidence could undermine Labour’s central economic priority of accelerating growth.
Chancellor Rachel Reeves acknowledged the challenges facing the economy, saying the government remained committed to its long-term economic strategy.
“Our economic plan is the right one, but I know there is more to do,” she said.
“In an uncertain world, we are building a stronger and more secure economy by cutting the cost of living, reducing national debt and creating the conditions for growth so that all parts of the country can prosper.”
Opposition figures were quick to criticise the government’s economic performance. Shadow chancellor Sir Mel Stride said Labour 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 now take urgent action, including cutting fuel duty, supporting North Sea oil and gas production and putting forward a credible plan to reduce the deficit and bring down the benefits bill.”
Looking ahead, economists believe growth is likely to remain subdued throughout much of the year.
The Office for Budget Responsibility recently downgraded its forecast for UK economic growth in 2026 to 1.1%, down from its earlier estimate of 1.4%.
Yael Selfin, chief economist at KPMG UK, said the latest GDP figures suggested the economy had begun the year on weak footing and could struggle to regain momentum.
“The UK economy started the year on the back foot and activity is expected to weaken further amid sharply rising energy prices,” she said.
Selfin added that government borrowing costs have increased in recent weeks as financial markets reassess the outlook for interest rates. Higher borrowing costs could act as a headwind for businesses and households alike.
“With expectations for weaker growth combined with rising costs, businesses are likely to scale back investment plans,” she said.
For policymakers, the challenge now lies in navigating a fragile domestic economy while responding to external shocks that threaten to push inflation higher and delay any relief from elevated interest rates.
Jamie Young
Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.
When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.
