UK economy stalls in January as growth fears mount amid Iran conflict

The UK economy unexpectedly stalled at the start of the year, intensifying concerns that escalating geopolitical tensions and rising energy prices could derail growth in 2026.

New figures from the Office for National Statistics (ONS) show that gross domestic product (GDP) recorded no growth in January, following a modest expansion of 0.1 per cent in December. Economists had forecast a stronger start to the year, predicting a monthly increase of around 0.2 per cent.

The latest data suggests that the UK economy entered the year with little momentum, even before the economic impact of the escalating conflict between the United States, Israel and Iran began to filter through global markets.

On a rolling quarterly basis, the economy grew by just 0.2 per cent in the three months to January, only slightly stronger than the 0.1 per cent recorded in the previous quarter and below analysts’ expectations of 0.3 per cent.

The figures reinforce growing fears among economists that the UK’s fragile recovery could stall further as rising oil and gas prices feed through into higher inflation and weaker consumer spending.

Liz McKeown, director of economic statistics at the ONS, said the latest figures highlighted the subdued nature of the recovery.

“The overall picture remains subdued,” she said, noting that several key sectors struggled to gain traction during the month.

The services sector, which accounts for roughly 80 per cent of the UK’s economic output, recorded no growth during January. Production output declined by 0.1 per cent over the same period, while construction activity provided the only positive contribution, rising by 0.2 per cent.

Economists warned that the stagnation in January leaves the economy vulnerable to external shocks, particularly the surge in global energy prices triggered by the widening conflict in the Middle East.

Martin Beck, chief economic adviser at consultancy WPI Strategy, said the disappointing GDP figures showed the economy had already begun losing momentum before geopolitical tensions escalated.

“The UK economy was already losing steam before the latest war-related shock,” he said.

Fergus Jimenez-England, associate economist at the National Institute of Economic and Social Research (NIESR), described the figures as a worrying signal for the months ahead.

“This is a worrying start to the quarter, given that the early-year improvement in business confidence is likely to be short-lived as global disruption linked to the Iran war hits the UK economy,” he said.

Financial markets have already begun adjusting their expectations for monetary policy as energy prices surge. Oil prices have climbed sharply in recent weeks amid fears of prolonged disruption to shipping routes in the Strait of Hormuz, one of the world’s most important oil transit corridors.

Brent crude remained above $100 a barrel on Friday, a level not seen since the energy shocks that followed Russia’s invasion of Ukraine.

The surge in oil and gas prices has complicated the outlook for the Bank of England, which had previously been expected to cut interest rates later this year as inflation gradually eased.

Before the outbreak of the conflict, markets had predicted at least two interest rate reductions in 2026, with investors assigning a roughly 90 per cent probability to a first cut at the Bank’s next meeting. However, rising energy prices have sharply reduced those expectations.

The Bank of England is now widely expected to keep its base rate unchanged at 3.75 per cent when policymakers meet next Thursday, as officials assess whether the energy shock could push inflation higher again.

Although UK inflation fell to 3 per cent in January and is forecast to decline further in the spring, analysts warn that higher energy costs could add as much as one percentage point to inflation later this year depending on how long the conflict persists.

Some economists have warned that household energy bills could rise by as much as £500 in the summer if wholesale gas prices remain elevated.

Government borrowing costs have also risen sharply as investors reassess inflation risks. The yield on benchmark UK government bonds climbed again on Friday, increasing by 0.10 percentage points to 4.78 per cent.

The weaker economic data adds further pressure on Chancellor Rachel Reeves, who has repeatedly emphasised the government’s focus on economic growth while maintaining fiscal discipline.

Responding to the latest GDP figures, Reeves acknowledged the economy faced significant challenges but insisted the government remained committed to strengthening growth.

“I know that 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, cutting national debt and creating the conditions for growth to make all parts of the country better off.”

Business groups have also urged ministers to take action to support investment and productivity.

Muniya Barua, deputy chief executive of BusinessLDN, said the latest figures were disappointing following a weak end to 2025.

“After a sluggish end to last year, it’s disappointing to see the economy start the year on the back foot again,” she said.

She warned that geopolitical tensions could undermine both business confidence and consumer spending while pushing inflation higher.

“The war in Iran threatens to hit business and consumer confidence while also pushing up inflation, so it’s vital that the government acts quickly to remove barriers to growth that are within its gift,” Barua added.

She called on ministers to accelerate major infrastructure projects, unlock sites for new housing and review changes to the business rates system that could deter investment.

The latest economic indicators already point to growing strains across the labour market. Unemployment has climbed to its highest level since the pandemic, driven largely by a sharp increase in youth joblessness, which has reached its highest point in more than a decade.

Combined with rising energy costs and slowing economic growth, the data suggests policymakers face a difficult balancing act in the months ahead.

For now, economists say the January figures confirm that the UK economy began 2026 on fragile footing, and that the unfolding geopolitical crisis could make the path to sustained growth even more uncertain.

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UK economy stalls in January as growth fears mount amid Iran conflict