Activity in the United Kingdom contracted in January, in particular because of measures to combat a highly contagious variant of the coronavirus, while foreign trade recorded a record drop with the exit from the European single market.
British GDP fell 2.9% in January after rising 1.2% in December, according to figures released Friday by the National Statistics Office (ONS). It is still 9% below its February 2020 level, before the shock of the pandemic.
“Restrictions were in place to varying degrees across” the country in January, including strict confinement in England, and the service sector was the main brake on the economy with in particular all non-essential businesses closed, recalls the ONS.
“The economy was hit hard in January albeit a little less than some feared, with shops, restaurants, hairdressers, schools affected.” by activity restrictions, comments Jonathan Athow, ONS statistician.
He also points out that the manufacturing sector recorded its first drop in production since April, notably in the production of cars, even though health services were boosted by the vaccination campaign.
Last year, GDP suffered a record contraction of nearly 10% in the United Kingdom, the European country most bereaved by the pandemic, and a member of the G7 with the sharpest fall in its economy.
Go down the better to go back up?
For Paul Dales of Capital Economics, January should be the “The lowest point for this year given that the vaccination campaign and the reopening of the economy should stimulate a rebound in activity”.
“By the beginning of next year, we believe that (…) GDP will have returned to its pre-pandemic level”, he adds.
Schools reopened in England on Monday, and non-essential businesses are expected to follow on April 12, before the restrictions currently planned for now by the end of June are lifted by the British government.
In addition, the consequences of Brexit were notable in the foreign trade figures published in parallel by the ONS, with exports of goods plunging 19.3% to 5.3 billion pounds in January due to a almost 41% of exports to the EU plummet.
For their part, imports of goods collapsed by 21.6% in January, due to a 29% plunge in purchases of goods from the EU.
In price and volumes, it is “the biggest drop in a month since these figures started to be measured in January 1997”, the ONS notes.
Foreign trade figures released on Friday “are the first since the end of the transition period after leaving the EU”, underlines the ONS, also arguing that containment had played in the disruptions in international trade.
A muddled transition
The January figures are also suffering from an unfavorable comparative effect, also recalls the ONS, because in November and December British foreign trade had, on the contrary, benefited from an influx of imports and exports, with companies trying to stockpile in forecast of the effective exit from the single market and potential disruptions in early 2021.
The exit from the single European market entered into force on January 1 and had a strong influence on foreign trade, between bottlenecks in ports already under pressure with the pandemic and the travel restrictions that took place in January, and backlogs of orders accumulated since the start of the pandemic.
To this were added multiple red tape, additional and sometimes unexpected costs and taxes that weighed on cross-border trade.
“Part of the decline can be attributed to containment, stockpiles and early problems” leaving the EU, but “it is clear that the Brexit transition has been far from smooth”, notes Danni Hewson, economist at AJ Bell.
“The markets will be watching closely if the current frictions translate into long term changes”, she adds.