The British Pound weakened against major currencies, led by losses versus the US Dollar, after data showed the UK economy stalled at the start of the year, raising concerns about a fragile recovery as energy costs rise.
Figures from the Office for National Statistics showed UK GDP was unchanged month-on-month in January, missing expectations for a 0.2% increase and following a 0.1% rise in December.
The Pound to Dollar exchange rate (GBP/USD) fell to 1.32661 (-0.64%), while the Pound to Euro exchange rate (GBP/EUR) traded around 1.15925 (+0.03%) as markets digested the softer growth data.
Economists say the disappointing headline figure was partly driven by volatile sectors and temporary factors that may unwind in the coming months.
Pantheon Macroeconomics said the January weakness reflected “noise” in erratic parts of the industrial sector rather than a sudden loss of momentum.
“GDP undershot expectations partly because of volatility that will unwind,” Pantheon said, pointing to a sharp 7.7% monthly fall in machinery and equipment production and a 9.0% drop in electrical equipment output.
“These sectors are notoriously erratic and should rebound in February,” the consultancy added.
Pantheon nevertheless trimmed its forecast for first-quarter growth.
“January’s disappointment leads us to cut our Q1 GDP forecast to 0.2% quarter-on-quarter from 0.3% previously,” the economists said.
Weather-related disruptions also appear to have played a role. Construction activity weakened and heavy rainfall likely kept shoppers away from the high street, limiting services sector growth.
Looking ahead, the firm warns that geopolitical tensions and higher energy prices could weigh on activity in the coming months.
“Surging uncertainty from the US-Israel war with Iran risks hitting sentiment surveys and growth in March,” Pantheon said, though the scale of the impact will depend heavily on how long hostilities last and how severely oil supplies are affected.
Lloyds analysts struck a slightly more balanced tone, noting that the weak January reading does not necessarily threaten the broader quarterly outlook.
“Given the way Q4 evolved, this soft start to the quarter does not translate to much downside risk for Q1 expectations,” Lloyds said.
The bank noted that the Bank of England’s latest forecast for 0.2% quarterly growth in Q1 still appears achievable even if February growth is modest.
However, the details of the report highlighted areas of concern.
Within the services sector, hospitality and employment-related administrative services were key drags on activity. Lloyds said the decline in the latter sector may point to emerging weakness in the labour market.
ING economists similarly described the data as a “lacklustre start to 2026”, though they caution against reading too much into a single month’s figures.
“These monthly GDP numbers tend to bounce around, and the economy is probably still recording modest growth overall,” ING said.
Indeed, the bank noted that UK growth data has often shown a weak January followed by stronger readings later in the quarter, a pattern seen repeatedly in recent years.
Nevertheless, ING warned that the outlook is becoming more challenging as energy prices rise.
“The longer gas and oil prices remain elevated, the bigger the impact on growth,” the bank said.
Higher energy costs are expected to push inflation higher while the labour market cools, potentially squeezing real household incomes later this year.
For the Bank of England, the combination of weaker growth and rising inflation presents a difficult balancing act.
ING believes the threshold for raising interest rates remains high, but elevated energy prices could force the central bank to keep policy on hold for longer than markets previously expected.
The latest GDP data suggests the UK economy is still expanding, but only gradually, leaving it vulnerable to external shocks in the months ahead.
