UK economy grows 0.2% in three months to January, less than expected

UK economy ground to halt even before Iran war energy shock, data shows

Analysis of UK Economic Stagnation and the Impact of Global Events

By Andy Bruce and Suban Abdulla

Unexpected Stagnation in GDP Growth

LONDON, March 13 (Reuters) - Britain's economy stagnated unexpectedly in January and expanded only weakly in preceding months, underlining investor concerns about its vulnerability to the economic fallout from the war in Iran, official data showed on Friday.

The figures mean British gross domestic product has been essentially flat since June, ending January at the same level as six months earlier.

Official Statistics and Market Reaction

GDP was flat in January, the Office for National Statistics said, dashing the median prediction in a Reuters poll of economists for a 0.2% month-on-month increase.

In the three months to January it rose by 0.2%, against expectations for a 0.3% increase.

Sterling slipped against the U.S. dollar on the back of the figures, which showed no growth in the dominant services sector in January, against modest upticks in manufacturing and construction output.

Investor Concerns and Economic Vulnerabilities

Investors view Britain as more exposed than many other Western countries to an energy price shock due to its stretched public finances, tepid economy, and its heavy reliance on imported gas - prompting a severe drop in British government bond prices this month.

Despite the disappointing GDP data - which would usually spur expectations for Bank of England interest rate cuts - the opposite happened on Friday, with the market now pricing in a roughly 86% of an interest rate hike by the end of the year due to rising inflation risk.

"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," Fergus Jimenez-England, associate economist at NIESR, said.

Energy Prices and Future Economic Outlook

Oil Prices Surge Amid Global Uncertainty

OIL BACK AT $100

Brent futures for rose early on Friday to $100.56 a barrel, up 0.1% on the day and heading for about a 9% weekly increase.

Projected Impact on UK Growth

"We expect the impact on growth in the first quarter to be limited, but if energy prices remain elevated for the rest of the year it could reduce GDP growth by around 0.2 percentage points in 2026," added Jimenez-England.

Last month, the Bank of England said it expected the economy to grow 0.3% in the first quarter as a whole and 0.9% over 2026 as a whole - although that was before the conflict in Iran kicked off, prompting a surge in oil prices.

Government Response

Earlier this week, finance minister Rachel Reeves said it was too soon to say how soaring energy prices would affect Britain's economy.

(Reporting by Andy Bruce and Suban Abdulla; editing by William James and Susan Fenton)