The UK economic growth shrank by 0.1% in January, marking a slowdown after December’s 0.4% growth. This unexpected contraction has raised concerns about the country’s economic momentum and its impact on wages, jobs, and government revenue and funds.
What Is GDP and Why Does It Matter?
Gross Domestic Product (GDP) measures the total economic activity of a country, including businesses, government spending, and household consumption. The UK’s Office for National Statistics (ONS) releases GDP figures monthly, but quarterly reports are considered more significant.
A growing GDP signals a strong economy, leading to higher wages, more jobs, and increased government revenue. In contrast, a shrinking GDP can lead to recession, job losses, and reduced public spending. If GDP declines for two consecutive quarters, the country is officially in a recession.
How Is the UK Economy Performing?
The UK saw strong growth in early 2024, recovering from a brief recession at the end of 2023:
- January-March 2024: GDP rose by 0.7%
- April-June 2024: GDP grew by 0.5%
- July-September 2024: The economy stagnated with 0% growth
- October-December 2024: GDP edged up by 0.1%
However, January 2025 saw a 0.1% decline, raising concerns about future growth. The fall was driven by weaker construction and oil and gas extraction, although increased consumer spending helped offset some losses.
Government and Bank of England Forecasts
The UK government has prioritised economic growth, but the Bank of England recently halved its 2025 growth forecast to 0.75% from 1.5%. Several factors are weighing on growth:
- Higher inflation from rising wages and national insurance costs
- Increased energy and water bills impacting consumers
- US trade tariffs potentially pushing prices higher
The Office for Budget Responsibility (OBR) is expected to revise its economic forecasts on 26 March, with further downgrades likely.
How Does GDP Affect Everyday Life?
When GDP grows, people earn more, pay more in taxes, and see improved public services like healthcare and education. However, during economic slowdowns:
- Tax revenue falls, potentially leading to spending cuts or tax hikes
- Wages stagnate, making it harder for households to keep up with rising costs
- Job losses increase, particularly in sectors sensitive to economic downturns
The 2020 COVID-19 recession was the UK’s worst in over 300 years, forcing the government to borrow hundreds of billions to stabilise the economy.
How Is GDP Measured?
The ONS calculates GDP using three methods:
- Output: The value of goods and services produced across industries, from construction to retail
- Expenditure: Total consumer, business, and government spending, plus exports minus imports
- Income: Wages, corporate profits, and other earnings generated in the economy
While the UK releases quick GDP estimates within 40 days, they often get revised as more data becomes available.
Are There Limitations to GDP?
Despite its importance, GDP has drawbacks:
- Unpaid work (e.g., childcare and elder care) isn’t counted
- Wealth inequality can increase even if GDP rises
- Living standards may not improve if GDP growth doesn’t outpace population growth
- Environmental impact isn’t considered, leading to calls for sustainability-focused economic measures
Since 2010, the ONS has tracked well-being alongside GDP, factoring in health, education, and personal finances. However, GDP remains the primary tool for economic policymaking and international comparisons.
The Outlook for the UK Economy
With economic growth slowing and inflationary pressures rising, the UK faces uncertain economic prospects in 2025. The government’s fiscal policies, global trade conditions, and consumer spending trends will play a crucial role in determining whether growth can be sustained.
