UK economy shrank 2.9% in January - less than expected

Exports to the EU slumped 40% in biggest fall on record following Britain's exit from the economic bloc

Lorries enter the Port of Dover in England following Britain's departure from the EU. Exports of British goods to the EU collapsed by a record 40%t in January after the nation finalised its divorce frShow more

Britain’s economy contracted by 2.9 per cent in January when Covid restrictions tightened across the country, as exports to the European Union slumped by 40 per cent in the first month following the UK's exit from the economic bloc.

While gross domestic product fell less than expected from December, despite England plunging into its third national lockdown, the downturn in trade was more marked, falling by the most on record, according to the Office for National Statistics.

The decline in exports represents £5.6 billion ($7.8bn) in lost trade, with imports also down, plunging 28.8 per cent or £6.6bn in the first month since the start of new trading rules between the UK and EU.

UK finance minister Rishi Sunak said the fall in GDP highlighted the impact “the pandemic continued to have on our economy at the start of the year as we tackled the new variant of the virus”.

“But we also have reasons to be hopeful – we have set out a clear roadmap out of the pandemic, the NHS has vaccinated over 23 million people and my budget last week set out our three-part plan to protect the jobs and livelihoods of the British people.”

Britain's economy shrank by 1.7 per cent in the three months to January, leaving the economy 9.2 per cent smaller than in January last year, the ONS said.

ONS statistician Jonathan Athow said the country took a “notable hit” in the first month of 2021 when retail, restaurants, schools and hairdressers were closed in the latest lockdown.

While manufacturing also saw its first decline since April, with car manufacturing falling significantly, increases in health service output through the vaccine drive and increased testing “partially offset the declines in other industries,” he said.

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

Paul Dales, chief UK economist at Capital Economics said there are two important caveats to January's terrible trade figures.

"First, exports and imports had been boosted late last year by activity being brought forward ahead of Brexit, so trade volumes were always going to fall in January," he said.

"Second, some of the falls are a result of January’s Covid-19 lockdowns that have reduced activity in the UK and wide parts of Europe. Indeed, in late December the French closed their borders with the UK due to the emergence of the UK Covid-19 variant. So it is not all about Brexit."

Britain has faced almost 12 months of restrictions since the start of the crisis, causing the economy to contract by almost 10 per cent last year – the most in 300 years.

Prime Minister Boris Johnson has set a roadmap out of lockdown that eases England's coronavirus restrictions gradually before lifting most of them by June 21.

Britain's economy is expected to shrink by 4 per cent in the first quarter of 2021, thanks to a combination of the latest lockdown and the disruption caused by new, post-Brexit rules on trade, the Bank of England said last month.

However, analysts said Friday's data along with other recent indicators suggest the contraction may be less severe.

“While January’s lockdown has unsurprisingly hit the hospitality, retail and education sectors, returning to levels of output last seen in summer 2020, many other sectors have not been affected to anything like the same extent as they were last year,” said Rory Macqueen, principal economist at the National Institute of Economic and Social Research.

“With February and March likely to see activity at similar levels, this provides further support for the view that the fall in the first quarter of 2021 may be smaller than expected.”

Mr Macqueen said the pace of recovery from the second quarter will depend on how quickly public confidence returns, whether the vaccination drive sticks to its targets and whether further mutations or outbreaks bring about a resurgence in the virus.

Britain’s services sector, already hit hard by the social-distancing rules last year, shrank 3.5 per cent in January, a much less severe contraction that the 18.3 per cent seen last April during the first lockdown.

Many companies have now adapted to life under lockdown, including retailers which have ramped up their online shopping offering.

Growth in the next few months will also receive a boost from Mr Sunak's budget statement, which pledged to pump a further £65bn into the economy, and to extend the jobs-protecting furlough scheme.

The BoE is expected to keep its stimulus programmes on hold at the end of its March meeting next Thursday as it predicts that Britain's vaccination programme - Europe's fastest - will trigger a bounce-back in the economy in the coming months.

While the lender expects a return to end-2019 levels by the start of 2022, governor Andrew Bailey warned earlier this month that the risks to the economy are tilted to the downside.

Separately, the British public's expectations for inflation over the next 12 months held at their lowest level in more than four years on Friday, in sharp contrast to a recent rise in market expectations, according to BoE data.

Average expectations for inflation over the next 12 months stayed at 2.7 per cent – the joint-lowest reading since August 2016 alongside November's figure, based on a survey conducted in February.

Asked about inflation for the following year, the public saw it at 2.2 per cent, compared with 2.1 per cent in November, while longer-term inflation expectations held steady at 2.9 per cent.

The BoE expects consumer price inflation to reach just over 1.5 per cent by the middle of this year - as prices will be compared against depressed levels at the start of the pandemic - and to sit just over its 2 per cent target until early 2024.

Unlike the general public, financial markets have sharply revised up their expectations for medium-term inflation since the start of this year.

Last month, BoE chief economist Andy Haldane warned central bankers around the world to keep an eye on prices as he compared inflation to a "tiger" that has been woken up and could prove difficult to tame.