UK economy shrank less than expected in January lockdown

London

THE UK economy shrank less than expected in January during a coronavirus lockdown, driven by a surprise gain in construction and stronger activity in the health sector.

Gross domestic product (GDP) fell 2.9 per cent after a gain of 1.2 per cent in December 2020, the Office for National Statistics said on Friday.

The economy is now 9 per cent smaller than it was in February 2020 before the pandemic struck.

The reading will feed into the Bank of England's (BOE) decision next week on whether the United Kingdom needs more stimulus to recover from the biggest slump in three centuries.

Prime Minister Boris Johnson is hoping his rapid vaccination campaign will allow most restrictions to be lifted by the middle of the year.

"Increases in health services from both vaccine rollout and increased testing partially offset the declines in other industries," Deputy National Statistician for Economic Statistics Jonathan Athow said in a statement.

Manufacturing and services contracted, but the construction industry posted a gain, with output 0.9 per cent higher than in December. Construction was the biggest drag on GDP in December, when most other parts of the economy posted increases.

A 3.5 per cent drop in services was less than economists had forecast. It was driven by the accommodation and food services and education sectors, where output dropped 28 per cent and 16.3 per cent respectively.

Health and social work activity provided the biggest boost for the month. Real estate and information communication also increased in the month.

A category that includes hairdressers and other personal services fell almost 21 per cent.

The UK's first batch of official trade data since leaving the European Union exposed the damage done to the flow of goods and services by Brexit in January.

Exports to the EU fell 40.7 per cent from December to January, while imports to the bloc dropped 28.8 per cent. The hardest hit EU imports were machinery and transport equipment, especially cars and medicinal and pharmaceutical products.

"Both imports and exports to the EU fell markedly in January with much of this likely the result of temporary factors," Mr Athow said. "Returns from our more timely surveys and other indicators suggest trading began to recover towards the end of the month."

For now, the government's official forecaster, the Office for Budget Responsibility (OBR), expects a 3.8 per cent drop in output this quarter followed by a quick recovery to pre-Covid levels in the second quarter of next year, six months earlier than it had forecast in November.

The Bank of England (BOE) is even more upbeat, predicting a return to end-2019 levels by the start of 2022 after a 14 per cent surge in output over the preceding year, though Governor Andrew Bailey warned earlier this month that the risks to the economy are tilted to the downside.

The pandemic is still likely to leave scars on the economy, with implications for everything from unemployment to the eventual tax rises or spending cuts needed to repair the public finances.

Under the main scenario drawn up by the OBR, output is around 3 per cent lower in the medium term than it would be had the pandemic not happened. The BOE estimates the long-term hit at around 1.75 per cent. BLOOMBERG

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