UK economy unexpectedly shrinks in January, in blow to Treasury chief ahead of key statement

LONDON (AP) — The British economy unexpectedly shrank during January, piling pressure on Treasury chief Rachel Reeves before a key statement about the state of the public finances later this month.

Official figures Friday showed that the economy, the world's sixth-largest, saw output drop by 0.1% during the month, in contrast to expectations for a modest increase and December's solid 0.4% gain.

The Office of National Statistics said the weak performance was largely due to bad weather affecting the manufacturing and construction sectors, despite a solid performance by the services sector, which accounts for around 80% of the British economy.

Though monthly figures are notoriously volatile and prone to future revision, the decline puts in sharp relief the struggles the Labour government, elected last July after 14 years in opposition, is having in generating growth.

Prime Minister Keir Starmer has said raising the U.K.'s economic growth is his government’s number one priority over the next five years. Since the global financial crisis in 2008-9, the British economy's growth performance has been historically lackluster.

Starmer has pledged to boost living standards and generate funds for cash-starved public services. With growth proving elusive, the party’s popularity has fallen sharply since its election victory in July.

Critics say Treasury chief Reeves has been partly responsible for the economic slowdown since Labour returned to power, because she was overly gloomy when taking on her role and increased taxes, particularly on businesses.

After the January figures, she vowed to “turn around the poor performance of more than a decade” and that the government will go “further and faster” in promoting policies to boost growth.

In recent weeks, Reeves has set out plans to boost longer-term growth, such as backing a third runway at London’s Heathrow Airport. She has also pledged to create a Silicon Valley-like technology hub between the two university towns of Oxford and Cambridge, as well as a “reset” of the U.K.’s post-Brexit economic relations with the European Union. She has also pointed to the growth benefits of the recently announced ramp-up in defense spending.

The monthly decline is an uncomfortable backdrop for Reeves before she delivers a budget statement to Parliament on March 26. Because growth isn't generating the tax revenues hoped and borrowing rates remain relatively high, she is expected to announce a package of spending cuts in order to meet her fiscal rules.

Mel Stride, the Treasury spokesman for the main opposition Conservative Party, branded the government a “growth killer”, blaming tax rises and proposed changes to employment rights.