UK economy rebounds strongly despite December blip

The UK economy contracted less than expected in December as growth in the health sector offset the blow that the Omicron coronavirus variant dealt to many services industries.

Gross domestic product rose 7.5 per cent over 2021 compared with the previous year – the strongest pace of growth since the second World War – as the economy rebounded from the pandemic hit in 2020, despite continued weaknesses in its trade performance.

Output fell 0.2 per cent between November and December, data from the Office for National Statistics showed on Friday. That was a smaller decline than the 0.6 per cent drop forecast by economists polled by Reuters, but it was the largest contraction since January 2021.

“GDP fell back slightly in December as the Omicron wave hit, with retail and hospitality seeing the biggest impacts,” said Darren Morgan, ONS director of economic statistics. “However, these were partially offset by increases in the test and trace service and vaccination programmes.”

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Output expanded 1 per cent in the final quarter of the year compared with the previous one, thanks to strong growth in November.

In the three months to December, GDP was still 0.4 per cent below its level in the final quarter of 2019, before the pandemic hit. In contrast, output in the US, China and the euro zone recovered the ground lost during the crisis.

“The UK economy’s performance continues to underwhelm relative to its peers in the G7,” said Samuel Tombs, economist at Pantheon Macroeconomics.

However, assessing the extent to which the UK economy has recovered from the hit of the pandemic is complicated by differences in which the ONS calculates monthly and quarterly data. On the monthly figure, GDP in December was in line with its pre-pandemic level in February 2020.

Trade data

The ONS also published its trade data and showed that imports from non-EU countries had surpassed those from EU economies in 2021 for the first time since records began in 1997.

Cornelius Clarke, economist at the financial services Ebury, said that “evidently the end of the Brexit transition period has impacted trading relationships that many UK businesses have with their EU counterparts”.

Annual imports and exports in 2021 increased by 8 per cent and 5 per cent respectively compared with 2020, but both remained lower than 2018 levels.

Mr Tombs said that while the coronavirus “can’t be blamed” for the UK’s continued underperformance, “exports continue to stand out as an area of significant weakness”.

Growth in December was dragged down by services, where output fell 0.5 per cent compared with the previous month as consumers spent less in cinemas, bars, and restaurants because of the spread of Omicron.

Retail sales and output in the hospitality sector fell 3.7 per and 9.2 per cent respectively. Output in arts and recreation fell 4.4 per cent.

Health sector

The fall in those sectors was offset by a 2.4 per cent expansion in the health sector, which the ONS said was largely driven by the NHS test and trace and vaccination programme.

Manufacturing output rose 0.2 per cent, boosted by growth in the pharmaceutical and car sectors. Construction also increased by a solid 2 per cent supported by strong expansion in infrastructure and new housing.

In its latest assessment of the economy, the Bank of England said that it expected the impact of Omicron to “be limited and of short duration”, with GDP recovering in February and March.

However, it also warned that growth in 2022 will be dragged down by the largest contraction in household real income in 30 years because of rising inflation, higher taxes, and surging energy costs. – Copyright The Financial Times Limited 2022