Economy shrinks 9.9pc in biggest annual contraction for 300 years

Economy shrinks 9.9pc in biggest annual contraction for 300 years

https://www.telegraph.co.uk/business/2021/02/12/economy-shrinks-99pc-record-annual-contraction/

Recovery slows sharply in the final quarter of 2020 as UK suffers the worst annual fall in GDP in 300 years
By Tom Rees 12 February 2021 • 10:00am

Britain is set to avoid a double-dip recession despite shrinking by almost a tenth last year in the worst annual plunge in GDP in three centuries, official figures have revealed.

The recovery slowed sharply in the final three months of 2020 but the economy averted another contraction despite tougher Covid restrictions.

The return of a national lockdown in the fourth quarter meant GDP rose by 1pc compared to the previous three months, a slowdown from a record 16.1pc jump in the third quarter, according to the Office for National Statistics.

The ONS said Covid testing and tracing programmes lifted GDP in the fourth quarter and business investment edged up. However, overall output remained 7.8pc below pre-virus levels.

The recovery held up better than economists had expected against the second wave of Covid cases but it was not enough to avert a historic annual fall in output.
Biggest hit since 1709

A weaker end to 2020 meant the economy contracted by 9.9pc last year, suffering its biggest annual collapse in GDP in more than three centuries. It was the worst hit since 1709 when the Great Frost, an extremely cold winter across Europe, froze economic activity.

The plunge was driven by struggling services with the retail, hospitality and arts sectors hardest hit by the pandemic. The services industry remains 7pc smaller than pre-Covid levels.

Economists expect stricter restrictions and the closure of schools will tip the economy back into contraction territory in the first quarter of 2021 but the vaccine rollout has lifted hopes of a recovery from the spring.

Following the small rebound in GDP in the fourth quarter, the economy’s reopening is likely to mean the UK avoids another technical recession - two consecutive quarters of falling output.

"The further restriction measures implemented in early January in light of new, more virulent strains of coronavirus have placed a firm dent in the UK’s path to recovery," warned Sam Miley, economist at Centre for Economics and Business Research. He predicted another sharp 3.5pc fall in GDP in the first quarter.

"A 3.5pc contraction would still amount to the second largest on record, far outweighing the previous large-scale contractions witnessed during the global financial crisis, the Winter of Discontent, and 1974’s stagflation."
Spring revival prediction

Britain’s growth prospects in 2021 will hinge on how quickly restrictions can be lifted with worries over new variants mounting.

"The fast pace of the vaccine roll-out means that we should expect most – but by no means all – parts of the economy to start growing again by the middle of 2021," said  James Smith, research director at the Resolution Foundation.

The Bank of England has predicted the economy will reach pre-Covid levels by the start of 2022 with growth expected to hit 5pc this year and 7.25pc in 2022.

Bank chief economist Andy Haldane said on Thursday the economy is "poised like a coiled spring", predicting that annual growth "could be in double-digits and inflation back on target" a year from now.

The UK's annual hit from Covid was far larger than many other badly affected countries, such as the US and Germany. While part of Britain's slump can be accounted for by differences in measuring GDP, the economy was also hurt by its reliance on so-called social consumption and longer lockdowns.
Chancellor urged to provide more support

Chancellor Rishi Sunak said there "were some positive signs of the economy’s resilience over the winter" but admitted activity has suffered a "serious shock".

"That’s why my focus remains fixed on doing everything we can to protect jobs, businesses and livelihoods," he said following the gloomy figures.

Business leaders and unions urged Mr Sunak ahead of the Budget on March 3 to continue the borrowing binge to prop up the economy.

Alpesh Paleja, economist at the Confederation of British Industry, called on the Chancellor to extend the furlough scheme until the summer and continue the business rates holiday for hard-hit sectors.

"It’s time to end the uncertainty and anxiety," said TUC general secretary Frances O’Grady. "The Chancellor must urgently extend full furlough support to the end of the year to keep jobs safe."