The UK economy unexpectedly stalled in January as a sharp fall in restaurant and café spending highlighted continued pressure on consumer demand.

According to the Office for National Statistics, gross domestic product recorded zero growth during the month, missing economists’ forecasts and following modest growth of 0.1 per cent in December.

The services sector, which accounts for the majority of UK economic activity, showed no overall growth. Within this, food and drink service activities fell by 2.7 per cent, signalling weaker discretionary spending among consumers.

The ONS said the overall economic picture remains “subdued”, while analysts described the figures as a disappointing start to the year.

GDP measures the total economic output of businesses, governments and households and is widely used as the key indicator of economic performance.

Consumer caution continues

The decline in hospitality activity suggests household spending remains fragile as consumers continue to navigate higher living costs and economic uncertainty.

Growth had already been losing momentum in the second half of last year as shoppers held back spending amid concerns over potential tax rises and rising unemployment.

Elsewhere in the economy, production output fell by 0.1 per cent in January while the construction sector saw a modest increase of 0.2 per cent.

On a less volatile basis, the economy grew by 0.2 per cent in the three months to January, up slightly from 0.1 per cent in the previous three-month period.

For grocers and food retailers, weaker discretionary spending could continue to shift purchasing behaviour toward value products, promotions and at-home consumption, trends that have already shaped the grocery market over the past year.

Energy shock could weigh on spending

The economic outlook has also been clouded by geopolitical tensions following the outbreak of conflict between the US-Israel alliance and Iran, which has driven a surge in global energy prices.

Prime Minister Sir Keir Starmer warned this week that the longer the conflict continues, the greater the risk of economic disruption.

While households covered by Ofgem’s energy price cap are protected from higher energy bills until July, consumers are already facing rising petrol prices and heating oil costs.

Economists warn that higher energy costs could push inflation upwards again, potentially delaying expectations that inflation would return to the Bank of England’s 2 per cent target this spring.

If sustained, analysts say rising costs could further weaken household spending power and slow the government’s efforts to stimulate economic growth.

Interest rate outlook uncertain

Before the escalation in the Middle East, markets widely expected the Bank of England to begin cutting interest rates as early as March. However, economists now increasingly expect the central bank to hold rates at its next meeting.

Yael Selfin, chief economist at KPMG UK, said the UK economy had started the year on weak footing.

“The UK economy started the year on the back foot and activity is expected to weaken further amid sharply rising energy prices,” she said.

Selfin added that rising borrowing costs and persistent inflationary pressures could keep interest rates higher for longer, creating further challenges for businesses.

“With expectations for weaker growth alongside rising costs, firms are likely to scale back investment plans,” she said.

Growth outlook weakens

The weak start to the year follows a downgrade to the UK’s economic outlook.

In its Spring Statement, the Office for Budget Responsibility reduced its 2026 growth forecast to 1.1 per cent, down from an earlier estimate of 1.4 per cent.

With consumer spending under pressure and businesses facing rising costs, economists expect growth to remain modest in the months ahead – creating a challenging trading environment for retailers, food producers and hospitality operators alike.