UK economy shrinks by most in 300 years

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UK economic output fell 9.9 per cent in 2020, the largest drop in 300 years and more than twice the fall during the financial crisis, laying bare the scale of the pandemic’s impact.

The economy grew more than expected in the fourth quarter despite extensive Covid-19 restrictions but remained smaller than before the pandemic. The outlook for the start of 2021 has darkened.

Output expanded 1 per cent in the three months to December from the previous quarter, according to data from the Office for National Statistics — a stronger showing than the 0.5 per cent forecast by economists polled by Reuters.

But the figures released on Friday showed UK output was down 7.8 per cent from the final quarter of 2019, twice the decline in Germany and three times the drop in the US. The differences reflect long periods of tough restrictions in the UK as well as generous US stimulus plans and tax cuts in Germany.

The 9.9 per cent decline for 2020 was the biggest since the great frost of 1709 and eclipsed the 9.7 per cent contraction of 1921, when world economies were battered by the post-first world war downturn. The UK remains the laggard among the G7 countries for which 2020 fourth-quarter data are available, even if comparisons are complicated by different accounting methods.

Line chart of Annual % change showing UK economy suffers biggest contraction in three centuries

Rishi Sunak, chancellor, said: “Today’s figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world.

“While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.”

Alpesh Paleja, lead economist at the CBI, said the Budget in March “comes at a critical time for the UK. Extending the furlough scheme through to summer and continuing the business rates holiday for another three months will help safeguard jobs, livelihoods and communities across the country.”

The Bank of England expects the economy to contract sharply in the first quarter because of the latest national lockdown. But the UK has been relatively swift with its vaccine campaign, raising hopes of an economic recovery from the spring.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “We look for a hefty 6 per cent quarter-on-quarter rebound in GDP in the second quarter, followed by a 2.2 per cent increase in the third.” That could mean a “faster recovery than in other European countries, where the vaccine rollout has been much slower”, he added.

In the final quarter of 2020, economic growth was supported by expansions in government expenditure and gross capital formation, which includes business investment and housing.

However, business investment was 10.3 per cent below its pre-pandemic levels, pointing to continuing uncertainty and subdued demand weighing on business capital expenditure decisions and limiting potential growth.

The ONS also reported a widening goods trade deficit in the last three months of 2020, driven by rising imports from the EU as businesses prepared for the end of the transition period.

In December, the economy expanded 1.2 per cent compared with the previous month, while the November figure was revised 0.3 percentage points up to a 2.3 per cent fall as England was in a lockdown.

Line chart of Index, 2018=100 showing UK GDP remains well below pre-crisis levels

“Loosening of restrictions in many parts of the UK saw elements of the economy recover some lost ground in December,” said Jonathan Athow, deputy national statistician for economic statistics, “with hospitality, car sales and hairdressers all seeing growth.”

An increase in Covid-19 testing and tracing had also boosted output, he added.

The services sector staged the strongest rebound, rising 1.7 per cent in December compared with the previous month as the reopening of client-facing services such as non-essential stores, bars and restaurants boosted sales.

Growth in manufacturing was slower than in the services sector but followed seven months of uninterrupted expansion. In contrast, output in the construction sector fell for the first time since the spring.

Jonathan Gillham, PwC chief economist, said: “These figures are much less worse than expected and show that, from an economic perspective, we are becoming more adaptable to being locked down”.

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