Britain’s economy shrank 2.6% during November lockdown

Fall in GDP raises fears of double-dip recession for the first time since the 1970s

Near-empty buses cross Waterloo bridge during lockdown with skyscrapers of the city of London financial district seen. UK finance minister Rishi Sunak said November's GDP contraction indicates “things will get harder before the get better”. Reuters

Britain’s economy contracted 2.6 per cent in November when new lockdown restrictions in England designed to curb the escalating Covid-19 cases dampened business activity.

The fall in gross domestic product was the first dip in output since April when the country was undergoing a stricter lockdown, according to the Office for National Statistics.

UK Finance Minister Rishi Sunak said the figures make it clear “things will get harder before they get better”.

“Today’s figures highlight the scale of the challenge we face,” he said. “But there are reasons to be hopeful – our vaccine roll-out is well under way and through our Plan for Jobs we’re creating new opportunities for those most in need.”

The Bank of England estimates Britain's economy shrank by more than 1 per cent during the final three months of 2020, and with a new lockdown in place since early January the country is likely to have fallen into a double-dip recession – the first since the 1970s.

The central bank boosted its stimulus package to almost £900 billion ($1.229 trillion) in November to help businesses survive England’s second lockdown. BoE governor Andrew Bailey said earlier this week that it was too soon to know if more stimulus will be needed.

November’s GDP contraction was less severe than analysts had forecast, indicating that the economy has built up some immunity to lockdowns with consumers adapting better to restrictions.

“November’s second lockdown was much less painful for the economy than the first with GDP falling to 'just' 8.6 per cent below the pre-crisis peak,” said Paul Dales, chief UK economist at Capital Economics.

“That compares to the 18.8 per cent month-on-month decline to 25.8 per cent below the pre-crisis level during the first lockdown in April 2020.”

A potentially larger hit to economic output is coming this month with schools and all non-essential shops closed, which has kept up pressure on the government and BoE to do more to protect people unable to work.

Manufacturing and construction were the most insulated from the November lockdown with output rising 0.7 per cent and 1.9 per cent respectively, because those sectors were exempt from the lockdown.

“Manufacturing may also have benefitted from some activity being brought forward ahead of Brexit,” Mr Dales said.

However, the services sector was the main drag on output with restaurants, coffee shops, gyms and hair and beauty salons all closing, leading to a 3.4 per cent contraction in November, a less severe result than the 17 per cent fall in April. Accommodation and food took the hardest hit with a 44 per cent slump, while arts and entertainment dropped 14 per cent.

Meanwhile, education output dipped only 1.3 per cent as schools stayed open in November, leaving overall services output 10 per cent below pre-crisis levels.

Darren Morgan, director for economic statistics at the ONS, said pubs and hairdressers were the most affected by the closures, while many other businesses adjusted to "new working conditions", such as the use of click and collect.

November's better-than-expected fall in output means the economy may avoid a double-dip recession in the fourth quarter, according to some analysts, and actually grow unless December’s reading shows a decline of 1 per cent or more.

Mr Dales said the economy’s increasing immunity to lockdowns is encouraging and means that vaccines may allow it to return to its pre-crisis peak earlier than forecast.

However, Richard Pearson, director at investment platform EQi, said a road to recovery will be fraught with challenges.

"With the economy in dire straits, negative bank rates are not off the table – so anyone saving for the long term should consider if their deposits might be better served away from dismal bank rates," he said.