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%.
Analysts said it was possible the economy had been held back in January by the effects of Storm Goretti and water supply outages in Kent that forced some businesses to close.
Over the broader three months to the end of January, growth rose by 0.2%.
Paul Dales, chief UK economist at the consultancy Capital Economics, said: “With GDP not rising at all in January, it is clear the economy was subdued even before the leap in energy prices triggered by the Middle East conflict.
“We previously thought GDP growth would be 1% this year, but under various scenarios for the length and severity of the jump in energy prices, it could be either 0.6%, 0.4% or 0.1% instead.”
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 this year or in 2027.
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 UK 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.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “Our expectations for a strong start to the year have diminished. And with the Iran conflict bubbling in the background, further headwinds will drag UK growth lower.
“With energy prices rapidly rising, higher oil and gas prices will squeeze real disposable incomes, constraining spending and investment. Hiring plans will probably be shelved too. And higher uncertainty will dampen animal spirits.”
