UK economy stalls

Daniela Hathorn, senior market analyst at Capital.com said:

“The flat GDP reading for January reinforces the sense that the UK economy entered 2026 on fragile footing, even before the geopolitical shock in the Middle East.

Zero growth, following a modest 0.1% expansion in December, suggests momentum was already subdued. While monthly GDP data can be volatile, the broader trend points to an economy struggling to build sustained traction. Business investment remains cautious, consumer confidence is still recovering from the cost-of-living squeeze, and higher borrowing costs continue to weigh on housing and spending activity.

The timing is particularly uncomfortable. The economy was showing limited resilience before the energy shock; now it faces the risk of renewed inflationary pressure. If oil and gas prices remain elevated, inflation could stay above the Bank of England’s 2% target for longer than previously expected. That creates a difficult policy trade-off. A weaker growth backdrop would normally support rate cuts, but higher energy-driven inflation reduces the Bank’s room to ease. For markets, this raises the risk of a stagflation-lite environment which is typically negative for consumer-facing equities and supportive of defensive positioning. Market pricing is already reflecting this change in outlook, with end-of-year positioning now showing increasing chances of a rate hike from the BOE.

Ultimately, the January data has showed that the UK did not have strong growth momentum going into this shock. The longer geopolitical tensions persist, the greater the risk that already-fragile activity is further undermined.”