LONDON (Reuters) – Britain’s economy shrank less than expected in January as the country returned to a coronavirus lockdown, but trade with the European Union was hammered as new post-Brexit rules came into force.
Gross domestic product was 2.9% lower than in December, the Office for National Statistics said.
Economists polled by Reuters had expected a 4.9% contraction and government bond prices fell, with investors taking the data as a sign the Bank of England was less likely to provide further stimulus to the economy .
Britain suffered its worst economic crisis in three centuries last year, when it shrank by 10%. It was also hit with the highest death toll from COVID-19 in Europe at more than 125,000 people.
But the country is racing ahead with vaccinations and, after Friday’s figures, economists said they expected the economy to contract by 2% in the first quarter of 2021, half of the forecast from the BoE just last month.
Many businesses are learning to cope with the shutdowns, including retailers that have stepped up online shopping operations and service companies that have tried to help workers do their jobs from home.
Samuel Tombs of Pantheon Macroeconomics predicted a 5% rebound in growth in the second quarter “which would reduce the chances that the Monetary Policy Committee will cut the Bank Rate this year.”
The BoE looks set to suspend its stimulus programs next Thursday.
ONS figures also showed that Britain’s exports and imports to the EU fell the most on record, although there was a delay in the collection of some data and it there were signs of recovery towards the end of January.
Exports of goods to the EU, excluding non-monetary gold and other precious metals, fell by 40.7%. Imports fell by 28.8%.
Many companies advanced imports to avoid border disruption from January 1, and global trade flows have been hit by the coronavirus pandemic.
Overall GDP figures have been hit hard by the impact of social distancing rules on Britain’s huge service sector.
“The economy took a noticeable hit in January, although weaker than expected, with retail, restaurants, schools and hairdressers all hit by the latest lockdown,” said Jonathan Athow, a statistician with the ‘ONS.
Manufacturing fell for the first time since April as auto production fell sharply.
But ING economist James Smith pointed to the boost in GDP from UK health policy’s response to COVID-19: “What really stands out is health spending, where the ramping up of the health care program Government test and trace and vaccination programs added 0.9% to GDP figures. only.”
The economy remained 9% weaker than in February last year, before the pandemic hit.
Prime Minister Boris Johnson plans to gradually ease coronavirus restrictions in England before lifting most of them by the end of June.
Growth in the coming months should also be boosted by Finance Minister Rishi Sunak’s announcement last week that he will inject an additional 65 billion pounds ($90.6 billion) into the economy, including an extension of its job-protected leave program.
The ONS said services output was down 3.5% in January from December. The Reuters poll had indicated a contraction of 5.4%.
Reporting by William Schomberg; Editing by Alistair Smout, Philippa Fletcher and John Stonestreet