After a brief recovery in December, the UK economy stumbled again in January, weighed down by declining industrial output and construction. While retail and services offered some resilience, uncertainty remains high and business investment is under pressure.

The labour market is showing signs of strain, with rising unemployment and upcoming national insurance increases adding pressure on businesses. As economic uncertainty deepens, how will these indicators shape Chancellor Rachel Reeve’s spending plans in the Spring Statement?

UK economy contracted in January

The UK economy contracted by 0.1% in January 2025 according to official figures, down sharply from growth of 0.4% in December 2024. The fall in January was driven by a notable contraction in industrial production with construction also having a poor month (see Chart 1). However, services continued to grow in January led by a strong month for retailers, especially food shops. The UK’s economic performance may have been muted in February, with any boost from consumer spending amid strong wage growth and lower interest rates weakened by the brake on business activity from this torrent of global uncertainty.

Jobs market facing choppier waters as surge in business costs looms

In the three months to January 2025, UK unemployment rose by 40,000. Public sector employment was estimated at 6.14 million in December 2024, an increase of 53,000 in annual terms. The biggest increases over the past year came in the NHS and public administration. The UK’s labour market may soon slide into choppier waters as April’s sizable surge in business costs and a flagging economy could well trigger both moderately higher unemployment and weaker pay settlements.

How business may react to national insurance rise

Ahead of April’s national insurance (NI) rise, the Bank of England has released analysis into its likely impact. At an aggregate level, the Bank estimates that the expected net effect of the changes to NI contributions will be to increase firms’ employment costs by 1.9 percentage points. Sectors that typically tend to be more labour intensive, such as consumer-facing businesses, will be the most affected. In its latest Decision Maker Panel Survey, more than half of the firms expect to respond to the NI increase by a combination of lowering profit margins, increasing prices, or lowering the number of employees (see Chart 2). Similarly, The Bank of England’s Agents’ annual pay survey suggests a pass-through of costs into higher prices and lower wage increases than would otherwise be the case.

Corporate insolvencies reach five-year high

Insolvency Service data showed that there were 1,971 company insolvencies in January 2025, the highest level registered in January for more than five years, 6% higher than in December 2024 and 11% higher than in January 2024. This is likely due to the impact of years of challenging trading conditions, including high inflation, and before April’s jump in business costs. Across 2024, the highest proportion of company insolvencies was recorded in construction (17%), followed by wholesale and retail trade, and accommodation and food service activities (both 15%).

Path to lower interest rates filled with uncertainty

The Bank of England kept interest rates on hold at 4.50% at its March meeting. The nine-person Monetary Policy Committee (MPC) voted 8-1 in favour of this outcome, with the one dissenting MPC member voting for a rate cut. While the vote to ‘hold’ was emphatic, there was enough in the meeting minutes to suggest that rate setters remain concerned over the health of the economy, keeping the door wide open for a May interest rate cut.

Global uncertainty nears record high

The Global Economic Policy Uncertainty Index climbed to 429.8 in January 2025, just short of the record high of 431.6 during the height of COVID-19 in May 2020 (see Chart 3). This index, which has been running since 1997, is compiled using the frequency of articles discussing policy uncertainty, measured across 21 countries and weighted by GDP. The recent spike in uncertainty coincided with the election of Donald Trump as US president, signalling new tariffs, greater global political instability and fears of higher inflation.

Implications for accountants, business owners and the economy

Overall, these figures suggest that the UK economy is in an unnerving period amid growing domestic and international uncertainty and growing inflation risks. Current economic conditions make the upcoming Spring Statement more problematic as it reinforces the prospect of a notable downgrade to the Office for Budget Responsibility’s (OBR’s) growth forecasts, further undermining the Chancellor’s spending plans.

UK economy – what to watch for next month

1. At the Spring Statement on 26 March, the Chancellor will present the OBR’s updated economic forecasts. The OBR is likely to forecast that the economy will grow more slowly this year than it expected at the October 2024 Budget. This means that the government may break its own fiscal rules or announce further spending cuts.
2. The next GDP data, to be released on 11 April, should show that UK economic activity recorded a modest return to growth in February.
3. ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – covering the first quarter of 2025, will be launched on 15 April.