The Office for National Statistics (ONS) reported that gross domestic product (GDP) rose by 0.2% in the November-to-January period, underperforming economist expectations of 0.3%. This marks a slowdown from prior quarters, with January recording flat output, missing the anticipated 0.2% monthly increase.

Trade Imbalance Hits Growth Hardest

Imports outpaced exports significantly, subtracting nearly one percentage point from growth—the largest drag from net trade since 2014. Manufacturing rebounded from prior losses linked to the Jaguar Land Rover cyber-attack, but services output remained flat, the weakest quarterly result in two years.

Consumer-facing services grew modestly by 0.2%, but this was offset by sharp declines in business-to-business sectors like professional and technical activities.

Labour Market Softens, Rate Cuts in Sight

The labour market showed signs of weakness, with the Bank of England revising its 2026 unemployment forecast to 5.3% from 5.0%. Wage growth slowed further, potentially paving the way for an earlier interest rate cut in spring if trends persist.

Inflation Path Clears for Monetary Easing

Inflation is projected to return sustainably to the 2% target this year, driven by the autumn Budget's energy bills package removing green levies, alongside falls in administered prices and broader CPI moderation. This supports expectations of Bank Rate reductions amid cooling pressures.

Productivity Puzzle Persists

Sectoral productivity data to Q3 2025 reveals IT, manufacturing, and professional services leading gains, while finance, insurance, and health lagged. Despite potential data revisions, UK productivity weakness remains a 15-year challenge, with forecasts banking on capital deepening and AI investment—though uptake remains uncertain.

Business Caution Amid Uncertainty

Investment intentions are tepid, with ONS surveys showing firms hesitant due to economic, political risks, and costs. Renewed US trade policy uncertainty from tariff rulings adds to caution, despite rising SME borrowing and improving confidence.

2026 GDP forecasts stay modest at around 0.9-1.0%, reflecting global headwinds and weak private sector momentum.