The UK economy unexpectedly shrank in January, with warnings that it could herald a slide into recession.

The 0.1% decline followed a 0.4% rise in December and will raise the stakes in the Treasury ahead of this month’s spending review.

Liz McKeown, ONS director of economic statistics, said: “The economy shrank a little in January but grew in the latest three months as a whole, with the overall picture continuing to be of weak growth.”

Construction and oil and gas extraction had a “weak month”, she said. This was partially offset by retail, particularly food shops.

Chancellor Rachel Reeves said: “The world has changed and across the globe we are feeling the consequences.”

She added the government is “going further and faster” to “kickstart economic growth”.

Nicholas Hyett, Investment Manager, Wealth Club, said: “This is not the news the Chancellor would have wanted before this month’s Spring statement, with the economy shrinking when it had been expected to show modest growth. 

“We could be at the start of a long slow slide into recession.” 

Ben Jones, CBI lead economist said:  “After a surprisingly strong performance in December, some pay-back was always a possibility in January. But the mixed picture across different sectors in recent months suggests the recovery is still fragile.    

“There are signs that the drop in business and consumer economic confidence following the Autumn Budget is bottoming out.  

“The government should be looking for every opportunity – not least via the upcoming Spending Review and industrial strategy – to support businesses with measures that them the confidence to invest, grow and boost productivity.”  

The FTSE 100 revived, closing close to 90 points, or 1.05%, higher at 8,632.33 after a volatile week of trading rocked by the latest twists and turns in Trump’s trade war.

Defence firms BAE Systems (up 4.18%) and Rolls-Royce (up 3.24%) rallied on news that German conservative leader Friedrich Merz has reached a tentative agreement with the Green party on plans for a €500bn fund for defence and infrastructure spending.

Going the other way, supermarkets were the worst performers after Asda said it would undertake a “substantive” programme of investment in price, availability and the shopping experience to get the business “firing on all cylinders again”, which will “materially” reduce profitability this year. The big groups all fell. Tesco (down 8.69%), Sainsbury’s (down 7.77%) and Marks & Spencer (down 5.22%).