UK economy flat amid worries over Iran impact – Daily Business

Services showed no growth in January

Britain’s economy flatlined in January, prompting concerns that the Iran war and next month’s hike in business rates will see a period of stagflation – stagnant demand and high inflation.

The zero growth for the month was weaker than had been expected, following surveys pointing to a revival in business sentiment early in the New Year and growth of 0.1% in December.

Policymakers at the Bank of England are expected to respond next week by leaving interest rates unchanged at 3.75%.

The Office for National Statistics (ONS) described the economy as “subdued” with no growth in the key services sector, while production fell by 0.1%. Construction grew by 0.2%.

There was a 5.7% fall in employment activities during the month – suggesting a decline in hiring by UK businesses at the start of this year.

Labour made economic growth its top priority and it was showing signs of recovery before hositilities broke out in the Gulf states. Brent crude oil is still trading over $100 a barrel this morning.

Fergus Jimenez-England, associate economist at the National Institute of Economic and Social Research, said: “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.

“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.”

Luke Bartholomew, deputy chief economist, at Aberdeen said: “There had been some hope that the UK economy was picking up around the turn of the year. But the fact that GDP stagnated in January suggests that the recovery in survey data was significantly overstating the health of the real economy.

“However, ultimately investors and policymakers are no longer particularly interested in the debate about the sort of momentum the economy started the year with. Instead, they are much more focussed on the Middle East conflict and the impact this will have on growth.

“Until quite recently, the Bank of England meeting next week was very likely to deliver a rate cut. But now even though the economy is weak, the meeting is very likely to result in rates staying on hold as policymakers give themselves time to see how the conflict plays out and the likely impact on inflation.”  

Chancellor Rachel Reeves 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.”

Retail sales flatten

Shopper spending in Scotland eased back in February, bringing an end to a seven-month run of growth.

Total sales were flat (0%) compared with February 2025, when they fell by 0.4%. This was below the 3-month average increase of 1.2% and below the 12-month average increase of 1%. Adjusted for inflation, there was a year-on-year decrease of 1.1%.

David Lonsdale, director, Scottish Retail Consortium, said: “Worries that January’s sparkling showing was an outlier appear to have been confirmed with flat sales figures correlating with a fall in shopper footfall.

“This brings an end to a seven-month run of pedestrian but nonetheless positive growth. It reinforces our concern that the challenges for retail are far from being in the rear-view mirror.

“The costs crunch affecting households and firms remain real and could be exacerbated by prolonged conflict in the Middle East, which may make for a bumpy few months ahead.”

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