The UK economy entered the Middle East crisis after a weak start to the year, according to official figures showing flatlining January output before the US-Israel war on Iran hit global energy prices.
Figures from the Office for National Statistics (ONS) showed 0% growth in gross domestic product (GDP), down from an increase of 0.1% in December, as the economy failed to recover from uncertainty surrounding the chancellor Rachel Reeves’s autumn budget.
Falling significantly short of City predictions for growth of 0.2%, the figures came as the UK and other countries faced a potentially severe economic hit as the Middle East conflict drove up oil and gas prices, hitting consumers with higher living costs.
Output in Britain’s dominant service sector flatlined, amid sharp declines in activity in the recruitment industry and hospitality sector.
Unemployment in the UK has risen to the highest level in five years in recent months, with businesses complaining that employer tax increases and a rising “national living wage” are hitting jobs. Hiring has fallen most in sectors including hospitality and retail.
The production sector – which includes manufacturing, mining, and energy generation – fell by 0.1% on the month, while the construction industry grew by 0.2%.
Over the broader three months to the end of January, growth rose by 0.2%.
Alpesh Paleja, deputy chief economist at the CBI, said: “The broader picture is still one of an economy treading water since the middle of last year.
“However, this data is already backward-looking. The near-term outlook is now dominated by heightened uncertainty surrounding conflict in the Middle East.”
Oil prices rose past $100 a barrel on Thursday for a second time this week, as widespread Iranian attacks on energy facilities across the region overshadowed a vast release of government reserves.
Analysts said that if sustained, higher energy prices would drive up inflation, dashing hopes of an interest rate cut from the Bank of England next week. Financial markets anticipate Threadneedle Street could be forced to increase borrowing costs next year.
Against an increasingly volatile backdrop, Reeves is expected to use a speech early next week to spell out Labour’s plan for the economy amid growing calls for an emergency energy support package.
Responding to the GDP figures, the chancellor said: “Our economic plan is the right one, but I know there is more to do.
“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.”
Experts said sharply rising living costs, alongside heightened geopolitical uncertainty, would damage consumer spending and business confidence, with the potential to trigger a recession if the conflict was sustained.
The economy grew by 1.3% in 2025, an improvement on growth of 1.1% in 2024, although worse than official forecasts of 1.5% amid uncertainty over tax increases and the health of the public finances.
