Rachel Reeves is under mounting pressure after the UK economy shrank in January, with a leading economist warning Britain is “on a knife edge” and at risk of plunging into a full-blown recession.
Official figures from the Office for National Statistics (ONS) confirmed a 0.1% contraction in gross domestic product (GDP) in January, dealing a fresh blow to the Labour Government just weeks before the Chancellor’s crucial fiscal statement on March 26.
Julian Jessop, Economics Fellow at the Institute of Economic Affairs, warned that while the figures might not be as bad as they appear, they highlight a sluggish start to the year.
He said the drop was partly a correction after December’s unexpectedly strong 0.4% growth, but added: “The underlying trend rate of growth is probably still around 0.2% per quarter.”
More worryingly, he pointed out that this weak level of growth falls far short of the optimistic forecasts underpinning last October’s Budget.
And with key fiscal measures set to take effect next month, he warned: “The best hope is that the current weakness is just a temporary phase as businesses adjust to higher costs.
“But there is also a growing risk that the announcement of a further round of tax rises and spending cuts in the fiscal event on 26 March will prolong the doom loop.”
Production output slumped by 0.9% in January, with manufacturing hit particularly hard, seeing a 1.1% decline.
Construction also struggled, while the dominant services sector barely scraped growth of 0.1%.
The labour market, Mr Jessop said, was beginning to “crack under the weight of higher costs and increased regulation.”
He warned: “In short, the economy is on a knife edge and the Chancellor could be about to tip the UK into a full-blown recession.”
Ms Reeves, who has staked her reputation on economic competence, insisted the Government had a clear plan to steer Britain through choppy waters.
She said: “While the recent GDP figures are disappointing, it’s important to recognise the resilience of our services sector and the underlying strengths of our economy.
“We are committed to implementing measures that will stimulate growth, support businesses, and ensure long-term economic stability.”
However with confidence faltering and Britain already flirting with recession after last year’s downturn, pressure is mounting on the Labour MP to deliver a spring Statement that reassures both businesses and households.
If she fails, Mr Jessop’s warning of a “doom loop” could become reality.