The UK economy is flat in January as restaurant spending falls and growth slows

The UK economy has stagnated at the start of the year as households cut back on spending as restaurants and food services face a sharp drop in activity.

New figures from the Office for National Statistics (ONS) show that gross domestic product (GDP) recorded zero growth in January, falling short of economists’ expectations and marking a drop from the modest 0.1% growth recorded in December. Analysts had predicted that output would grow by about 0.2% per month.

The disappointing performance highlights the fragile state of the UK economy even before the latest political shocks from the escalating US-Israel conflict with Iran, which economists warn could dampen growth by raising energy prices and fueling inflation.

The ONS said the overall economic picture remains “slow”, with consumer-facing sectors particularly weak. In the leading services sector, which accounts for around 80% of UK economic activity, there was a significant 2.7 per cent drop in food and drink service activity as households cut back on spending on food.

This reduction in visitors suggests that the pressure on the domestic currency continues to have a strong influence on consumer behavior. Restaurants and bars are often among the first sectors to feel the impact when consumers begin to tighten their budgets.

Broadly, the services sector showed no growth throughout the month, underscoring the cautious spending environment facing businesses.

Other sectors of the economy also delivered mixed results. Industrial production fell 0.1% during January, while construction activity provided one of the few bright spots, growing 0.2% during the month.

The lower reading follows a period of economic slowdown during the second half of 2025, when uncertainty over tax reforms, rising unemployment and cost-of-living pressures led many consumers to cut back on spending.

While the monthly GDP figure showed some volatility, the three-month average of economic activity, which tends to be relatively stable, showed little growth. In the three months to January, the UK economy grew by 0.2%, slightly stronger than the 0.1% recorded in the previous three months.

However, economists say the fundamental picture remains weak, especially as developments around the world threaten to worsen inflation and slow economic growth.

The latest data was compiled ahead of the outbreak of conflict involving the United States, Israel and Iran, which has sent global energy prices soaring. Oil prices have risen and gas markets are becoming increasingly volatile, raising concerns about reduced living costs for British households.

Prime Minister Sir Keir Starmer warned earlier this week that the longer the conflict in the Middle East continues, the more likely it will have a significant impact on the UK economy.

Higher electricity prices are already on par with the cost of petrol and diesel, and households with Ofgem’s highest energy prices will remain protected from rapid rises until the next adjustment period in July.

However, economists warn that the continued increase in electricity prices could quickly increase inflation again. Before the conflict erupted, inflation was expected to fall below the Bank of England’s 2% target in the spring. A renewed increase in energy costs could disrupt that trajectory.

The change in inflation has already affected financial markets. Expectations that the Bank of England will begin cutting interest rates in March have largely faded, as economists now widely expect policymakers to hold rates steady when they meet next week.

This change in interest rate expectations had an immediate impact on the mortgage market. Hundreds of mortgages have been canceled by lenders in recent days, and mortgage rates have risen back to levels not seen since last spring.

If political tensions persist, analysts say higher borrowing costs and weak consumer confidence could undermine Labour’s central economic priority of accelerating growth.

Chancellor Rachel Reeves acknowledged the challenges facing the economy, saying the government remains committed to its long-term economic strategy.

“Our economic plan is good, but I know we still have a lot to do,” he said.

“In an uncertain world, we are building a strong and secure economy by reducing the cost of living, reducing the national debt and creating the conditions for growth so that all parts of the country can thrive.

The opposition groups were quick to criticize the government’s economic performance. Shadow Chancellor Sir Mel Stride said Labor had left the economy facing external challenges.

“Labour’s mismanagement of the economy has left the UK vulnerable to the potential consequences of the Iran conflict,” he said.

“They must now take urgent action, including cutting fuel prices, supporting oil and gas production in the North Sea and putting forward a credible plan to reduce the deficit and cut benefits.”

Looking ahead, economists believe that growth is likely to remain low for the rest of the year.

The Office for Budget Responsibility recently lowered its forecast for UK economic growth in 2026 to 1.1%, down from its previous estimate of 1.4%.

Yael Selfin, chief economist at KPMG UK, said the latest GDP figures suggested the economy had started the year on a low note and could struggle to recover.

“The UK economy has started the year on foot and activity is expected to be weak despite rising electricity prices,” he said.

Selfin added that government borrowing costs have risen in recent weeks as financial markets reassess the outlook for interest rates. High borrowing costs can act as a windfall for businesses and households alike.

“Since weak growth is expected combined with rising costs, businesses are likely to postpone investment plans,” he said.

For policymakers, the challenge now is to navigate a fragile domestic economy while responding to external shocks that threaten to push up prices and delay any relief from higher interest rates.