The UK economy recorded zero growth in January 2026, according to preliminary figures from the Office for National Statistics, falling short of economists' expectations for a 0.2% month-on-month increase as polled by Reuters [1]. This stagnation follows a modest 0.1% growth in December and a similarly weak 0.1% expansion in the final quarter of 2025 [1]. The dominant services sector showed no growth in January, production contracted by 0.1%, and construction grew by 0.2% [1].
The data highlights slowing economic momentum even before the impact of the U.S.-Iran war, which has triggered a global energy price shock [1]. The conflict has led to a rally in oil and gas prices, raising concerns about inflation for energy-importing countries like the UK and prompting market participants to reassess the likelihood of an interest rate cut from the Bank of England later in March [1]. Mortgage rates in the UK have risen amid the escalating conflict, and government borrowing costs have experienced volatility [1]. As of Friday morning, markets are pricing in just a 1.83% chance of a rate cut from the central bank on March 19, according to LSEG data [1].
Market reactions to the GDP release were muted, with UK government bonds (gilts) little changed across most of the curve. Short-term 2-year gilt yields fell by 3 basis points, while the British pound dropped 0.4% against the U.S. dollar and remained flat against the euro [1].
Analysts expressed concern about the outlook. Deutsche Bank's Chief UK Economist Sanjay Raja noted that the report "was not what the doctor ordered," and expectations for a strong start to the year have diminished due to the Iran conflict, which is expected to further drag UK growth lower [1]. Raja warned that rapidly rising energy prices will squeeze real disposable incomes, constraining spending, investment, and corporate hiring plans [1]. Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, stated that any remaining hopes of an impending Bank of England rate cut had been "extinguished," despite the stalling economy [1].
CONCLUSION
The UK economy's flat performance in January, combined with rising energy prices and geopolitical tensions, has dampened market sentiment and diminished expectations for a near-term recovery. Analysts warn of further headwinds, and the likelihood of a Bank of England rate cut has sharply decreased. Market reactions have been cautious, with muted moves in bonds and currency.