UK economy shrinks less than expected

The UK economy shrank less than expected in December as activity to combat the Omicron variant helped offset the virus’s impact on services, official figures showed.

Output fell 0.2% from November to December in the largest contraction since January 2021, the Office for National Statistics said. The drop was smaller than the 0.6% average decline forecast by economists in a Reuters poll.

Services output fell 0.5%, driven by a 3.2% drop in wholesale and retail trade, where footfall was affected by the spread of the Omicron variant. Accommodation and food services output dropped 9.2% as people cancelled trips and stayed away from pubs and restaurants.

The effect of Covid-19 on services was partly offset by growth in coronavirus testing and vaccinations, which together added 0.7 percentage point to gross domestic product. Manufacturing output rose 0.2% and construction increased 2%.

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

The economy expanded by 1% in the fourth quarter of 2021 but GDP remained 0.4% lower than the final quarter of 2019. That performance contrasts with the US, France and Canada which have all outstripped their pre-pandemic level.

Prime Minister Boris Johnson and his ministers regularly boast that the UK is the fastest-growing economy in the G7 but economists have argued this glosses over Britain's lacklustre performance since the start of the pandemic.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Covid-19 can’t be blamed for the UK’s continued underperformance: Omicron hit all Western European countries simultaneously, and the UK government imposed fewer restrictions in December than those in the rest of Europe."

The ONS also reported a 3.9% increase in UK exports in December, caused entirely by a £1bn increase in exports to EU countries. Imports rose by 1.4% because of increased imports from non-EU countries with EU imports flat. The gap between non-EU and EU imports increased to £4.1bn - the widest recorded in 2021.

Annual imports and exports increased 8.4% and 4.9% respectively in 2021 compared with 2020. But both remained lower than 2018 levels.

"Exports continue to stand out as an area of significant weakness," Tombs said. "British exports started to underperform in Q1 2021, suggesting that the blame can be laid at Brexit’s door."