Chancellor Rachel Ree (Image: Getty)
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.
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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.
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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%.
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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.
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FYI, here are two indicative scenarios for the UK economy... ??????
I still expect a recovery in H2 2025, but with annual growth just half the 2% forecast by the OBR last October.
The risks are also skewed to the downside, reflected in my alternative scenario ??????
Blog to follow ？ pic.twitter.com/dQKvxGUcnY
— Julian Jessop (@julianHjessop) March 14, 2025
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"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.