UK economy shrinks by 7.5% in December despite record growth

UK economy shrinks by 7.5% in December despite record growth

The UK's economy grew by 7.5% last year, the fastest annual growth rate since the Second World War, despite falling back in December as the Omicron variant deterred consumer spending.

The UK suffered one of the largest annual economic contractions of any major economy in the last year when GDP fell by 9.4% in 2020 due to the fallout from the first wave of the epidemic.

The Office for National Statistics said output fell by 0.2% in December, a stronger than expected result as shortages of goods in the shops in the run up to Christmas and a record number of job vacancies slowed the economy after a 0.7% increase in November.

City economists were expecting a decline of 0.6% in GDP, but an increase in government spending on the vaccine booster programme and the test-and- trace system prevented an even larger slump.

Rishi Sunak credited the Treasury's 400 billion dollar package of support for the economy's resilience and made the right calls at the right time. The chancellor said that he is proud of the determination that the whole country has shown, and proud of our incredible vaccine programme, which has allowed the economy to stay open.

Labour and trade union leaders said there was little to celebrate as living standards come under the most sustained pressure for three decades due to Britain's cost of living crisis amid a faltering economic recovery.

Frances O Grady, the general secretary of the TUC, said real wages were plummeting as household energy prices and the cost of the weekly shop went up.

This toxic combination is hitting economic demand and weakening our recovery from the Pandemic. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the UK's economic recovery continued to underwhelm after a strong start to 2021 petered out in the final six months, due to chronic shortages of workers and materials and weaker export volumes after Brexit.

The UK's economy was smaller than before the epidemic, unlike the US, China and the eurozone because of the drop in GDP triggered by Omicron in December.

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. Tombs said that exports continue to be an area of weakness because of weakness.

The ONS said total exports of goods to the rest of the world fell by 10.5% in 2021, a decline of 36.8 billion barrels per day. The total imports fell by 23.4 bn compared to 2018, a decline of 4.8%.

Kitty Ussher, chief economist at the Institute of Directors, said that the latest snapshot from the economy showed the impact of a screeching halt to festive cheer with consumer-facing services down 3% in December compared to the previous month.

One of the most buoyant contributions to economic activity was probably the vaccine and test-and- trace programmes. We know from our own data that caution over Omicron decreased in January, so we are hopeful that growth will increase next month. James Smith, a research director at the Resolution Foundation, said he was optimistic that December would prove to be a blip.

The Omicron wave has only briefly stalled the UK's economic recovery, which should be more stable from here on in, allowing policymakers to focus on the more urgent cost of living crisis that Britain is experiencing. He said there were reasons to worry about the damage caused by a fall in trade.

Trade barriers with the EU have been introduced because of Covid's damage to trade.

The government also needs to redouble efforts to boost trade as part of a new economic strategy for 2020, as well as facing up to the cost of living challenge.