UK economy shrinks less than feared in January

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
Britain's prime minister Boris Johnson, left, and chancellor of the exchequer Rishi Sunak, second right, walk past shipping containers during a visit to Teesport in Middlesbrough, England, on 4 March. Photo: Scott Heppell/AP
Britain's prime minister Boris Johnson, left, and chancellor of the exchequer Rishi Sunak, second right, walk past shipping containers during a visit to Teesport in Middlesbrough, England, on 4 March. Photo: Scott Heppell/AP

The UK economy shrank at the start of the year as the country returned to lockdown, but output declined by much less than economists were expecting.

Data published by the Office for National Statistics (ONS) on Friday showed UK GDP shrank by 2.9% in January. Economists had forecast a month-on-month decline of 4.9%.

The slump was also much smaller than the fall in GDP seen during the first lockdown last year. Businesses have been better able to adapt to restrictions this time around and consumers have been more willing to spend.

“The UK economy may look like a punchdrunk boxer hanging off the ropes, but the blows are doing less damage each time," said Ulas Akincilar, head of trading at Infinox.

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Output in the services sector declined by 3.5% in January as schools and non-essential businesses were shut. However, the construction sector grew by 0.9%.

The ONS said GDP was 9% below pre-pandemic levels in January. Last October, following the recovery from the first wave of the virus, GDP was 4% below pre-pandemic levels.

The early estimate of economic output in January comes after a GDP expansion of 1.2% in December. Britain returned to lockdown at the start of this year, with schools and non-essential businesses ordered to shut.

The path of UK GDP since the pandemic struck. Chart: ONS
The path of UK GDP since the pandemic struck. Chart: ONS

The pound weakened against the dollar on the back of the data, which was published alongside figures showing a sharp decline in trade between the UK and EU.

"While the data beat expectations, the depth of the economic contraction continues to weigh on the pound at a time when a resumption in rising US yields places pressure on the risk environment in the G10 space," said Simon Harvey, a senior FX market analyst at Monex Europe.

Sterling was down 0.4% against the dollar to $1.3937 (GBPUSD=X) and flat against the euro (GBPEUR=X).

The pound slipped against the dollar in the wake of the GDP data. Photo: Yahoo Finance UK
The pound slipped against the dollar in the wake of the GDP data. Photo: Yahoo Finance UK

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said January would likely mark the low point for the UK economy. Tombs forecast a GDP rise of 1% in February and 1.5% in March.

"A wide range of near-real-time indicators show that the economic recovery has resumed, well before Covid-19 restrictions have begun to be lifted," he wrote in a note sent to Pantheon clients on Thursday.

The ONS said its survey of companies suggested business had begun to pickup by mid-February.

UK chancellor Rishi Sunak said there were "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," the chancellor said in a statement on Friday morning.

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