The UK economy is showing unexpected resilience as new reports reveal significant improvements in public finances, retail sales, and business activity. This positive shift offers a promising backdrop for Chancellor Rachel Reeves as she prepares for her spring statement on 3 March.
Record Surplus Boosts Confidence
In a surprising turn of events, the Office for National Statistics reported that the public sector finances recorded their largest monthly surplus since records began in 1993, reaching an impressive £30.4 billion in January. This figure far surpassed the Office for Budget Responsibility’s forecast of £24 billion, driven largely by an uptick in self-assessment and capital gains tax receipts. Notably, this surplus is double what was reported in January 2025.
Economists are taking note. Sandra Horsfield, a senior economist at Investec Bank, stated, “It’s been a hat-trick of good economic news for once for the UK. We had a disappointing end to last year, but as things look, we may be starting 2026 on a much brighter note.”
Retail Sales Surge
Retail sales also experienced a robust increase, with a 1.8% jump in January—the largest rise in nearly two years. This growth was fuelled by a resurgence in sales of artwork, antiques, and a strong performance from online jewellers, who benefitted from soaring gold prices. The post-Christmas discounting and heavy sales promotions also drew consumers back to higher-ticket items, including furniture and technology.
However, experts caution against overly optimistic interpretations of these figures. The ONS noted that January is traditionally a strong month for tax receipts, which may have inflated the public finance numbers. Furthermore, the retail sector’s boost was significantly influenced by an unprecedented demand for jewellery.
Accelerated Business Activity
Adding to the positive narrative, a recent survey from S&P Global revealed a marked acceleration in business activity across the UK’s private sector. The Purchasing Managers’ Index (PMI) indicated “a robust and accelerated upturn in new work” in both manufacturing and services, signalling the fastest growth since April 2024. This momentum comes on the heels of a decrease in inflation to 3% in January, down from 3.4% in December, which has sparked hopes of further interest rate cuts from the Bank of England.
Paul Dales, chief UK economist at Capital Economics, observed, “The economy started the year looking a lot healthier and will give the chancellor something positive to point to in her fiscal statement on 3 March.”
Caution Ahead
Despite the encouraging signs, economists remain cautious about the future. Rob Wood, chief UK economist at Pantheon Macroeconomics, expressed that while Reeves may have more fiscal room to manoeuvre than she did in the autumn budget, the outlook beyond March remains uncertain. Plans to raise fuel duty for the first time in 15 years could impact revenue, and the results of the upcoming Gorton and Denton byelection on 26 February pose a significant political test for Labour leader Keir Starmer.
Unemployment also looms as a concern, having risen to a five-year high of 5.2% in the last quarter of 2025, particularly affecting young workers. The PMI data indicates that job losses are continuing into February, marking the 17th consecutive month of workforce reductions as businesses grapple with rising employment costs.
Why it Matters
The latest economic indicators present a mixed bag for the UK, illustrating both a recovery and ongoing challenges. While the record surplus and uptick in retail sales provide a solid foundation for Rachel Reeves’ upcoming spring statement, the spectre of high unemployment and potential political instability underscores the fragility of this recovery. Policymakers must navigate these complexities carefully to foster sustained economic growth in the months ahead.
