The United Kingdom has encountered an unforeseen economic contraction in January, driven primarily by a significant decline in manufacturing output. This unexpected downturn adds considerable pressure on the Bank of England as it prepares for its upcoming monetary policy decision next week. The latest data from the Office for National Statistics indicates that Britain's monthly gross domestic product (GDP) decreased by 0.1% in January, contrasting sharply with a 0.4% increase in the preceding month.
This reading defied market expectations, which had anticipated a modest 0.1% rise for the month. Year-on-year, the British economy experienced a growth of 1%, a deceleration from the previous 1.5% expansion and falling short of consensus estimates that predicted a gain of 1.2%. In the quarter leading up to January 2025, the UK GDP saw a slight increase of 0.2% compared to the three-month period ending in October 2024. Les McKeown, Director of Economics at the ONS, highlighted that the decline recorded in January was largely attributable to a marked slowdown in the manufacturing sector.
Additionally, oil and gas extraction, as well as construction activities, also faced challenges during this period. UK monthly manufacturing output suffered a notable decline of 1.1%, with contractions reported across 9 out of 13 subsectors. The steepest declines were evident in the production of basic metals and metal products, manufacturing and repair services, alongside the manufacturing of basic pharmaceutical products and their preparations.
Furthermore, construction output dipped by 0.2% month-over-month, primarily due to a reduction in new projects, which offset gains made in repair and maintenance work. Conversely, the service sector exhibited growth, rising by 0.1% in January. Outputs increased in six of the 14 subsectors, with the most substantial gains coming from administrative and support services, followed closely by wholesale and retail trade, as well as the repair of motor vehicles and motorcycles. In light of these latest GDP figures, attention now shifts towards the Bank of England as it approaches its critical interest rate decision scheduled for March 20.
Analysts at Oxford Economics forecast that the British central bank will maintain its key interest rate at 4.5%. They suggest that the so-called "cut-hold tempo" is already firmly rooted in the current economic landscape. "The Bank Rate remains significantly above all indicators of neutrality, and barring any sudden or unexpected shifts in growth or inflation perspectives, we anticipate that a 25 basis points cut in May is virtually assured," Oxford Economics stated. $UK100.