Increased lockdown restrictions and a drop in exports caused by Brexit led the UK economy to shrink by 2.9 per cent in January, according to the latest data from the Office for National Statistics (ONS).
However, January’s fall is somewhat better than the 4.9 per cent contraction that economists were expecting.
The ONS data revealed that the UK economy is 9 per cent smaller than it was before the pandemic began in February 2020, or “the last full month of ‘normal’ operating conditions”. This indicates the substantial impact the pandemic has had.
Source: FE Analytics
Services was the biggest contributor to the decline in GDP, a sector which has nowhere near recovered to its pre-pandemic levels due to repeated lockdowns. It is currently 10.2 per cent below its February 2020 levels.
But a new key contributor was a decline in exports, driven by the UK’s full exit from the European Union (EU) at the end of last year.
The ONS data said: “We also received some responder-led evidence of export-related pressures following the UK’s departure from the European Union (EU). […] from mid-January onwards 20 to 25 per cent of manufacturing businesses that indicated they exported in the last 12 months had been unable to export during this period.”
This decline in exports also drove down the manufacturing output for the first time since April 2020, with a fall of 2.3 per cent.
Derrick Dunne, chief executive at Beaufort Investment, said that the decline in GDP is telling of the tough coronavirus restrictions which have been in place for some time.
He said: “The January drop in UK GDP is another damaging blow to an economy still reeling from its worst ever annual fall in productivity. Viewed against the modest growth recorded in December, January’s drop of 2.9 per cent is bleak but not surprising in light of a third national lockdown spanning most of the month.”
While there were some bright spots in the data, Dunne said that the economic impacts of Covid-19 are likely to linger in the UK for some time.
“In a very real sense, the events of 2020 continue to haunt the economy, with GDP still 9 per cent below its pre-pandemic levels. But savers and investors should avoid being spooked by today’s data, resist rash decisions, and focus instead on ensuring that their plans continue to serve their long-term goals once the recovery begins,” he added.
While this bleak start to the year was somewhat unsurprising, according to Jon Hudson, manager of the Premier Miton UK Growth fund, investors could still be optimistic about a recovery.
“The UK economy looks set for a strong bounce back once restrictions ease,” he said.
One thing the GDP announcement could impact is the Bank of England (BoE’s) decision on interest rates at next week’s meeting, according to David Page, head of macro research at AXA Investment Managers.
Page said he doesn’t expect the BoE to drop down to negative rates in response to the ONS data.
Instead: “We expect the Bank to leave policy unchanged at next week’s meeting, but provide a dovish tone to address the disinflationary impact that this tightening in financial conditions would otherwise deliver.
“Any market reaction – and so far there is little reaction in sterling currency markets to today’s upside surprise – over the coming weeks in anticipation of stronger growth could exacerbate this headwinds from financial conditions.
“The Bank will monitor these developments, but it could add to the need for an additional tweak to the BoE’s QE envelope in May to remove the outlook for a tapering in BoE asset purchases materially ahead of that of international peers, as we still, on balance, expect.”