The UK economy shrank by less than expected in January, despite the country being plunged back into lockdown as a result of the Covid-19 pandemic.
Figures from the Office for National Statistics showed that gross domestic product (GDP) was 2.9% lower than in December, less than the 4.9% drop analysts had forecast.
Services output was the driving force behind the upward surprise, falling 3.5% in January despite general consensus suggesting it would contract by 5.5%. Additionally, construction output rose by 0.9% month-on-month in January.
David Page, head of macro research, AXA Investment Managers, said: “While monthly data has proven volatile in this climate, the better than expected January output leaves the outlook for Q1 better than we expected. Admittedly, construction, which had recovered well since the pandemic should be supported by renewed buoyancy in the housing market but remains vulnerable to weather shocks and could stumble over the coming months.”
Ulas Akincilar, head of trading, Infinox, said: “The UK economy may look like a punchdrunk boxer hanging off the ropes, but the blows are doing less damage each time. The crucial question is whether the apparent resilience is because the economy is tougher than it was a year ago, or simply because it has shrunk so far already there is less scope for further falls. Certainly, there is a mountain to climb to get things back to their pre-Covid rules. The economy is still 9% smaller than it was last February.
“But the roadmap out of lockdown, and the success of the vaccination programme, are steadily firing up sentiment. As the lockdown restrictions are eased that strengthening sentiment should translate into spending and a steady return to growth.”
Ian Warwick, managing partner, Deepbridge Capital, said that despite GDP falling in January, following growth of 1.2% in December, there are “clear glimmers of light” for the UK in the wake of the pandemic, driven by the UK’s successful vaccination programme and the government’s capital lifeline for businesses.
Warwick said: “The UK continues to be a leader in the start-up and scale-up ecosystem and this will be increasingly important over the months and years ahead. As well as the Covid-specific measures introduced by the Chancellor, initiatives such as the Enterprise Investment Scheme will continue to be vitally important in empowering growth in the UK.”
Following the speed of the UK’s vaccination programme, economists now expect the economy to shrink by 2% during the first quarter of this year, half of what the Bank of England forecast last month.
Paul Craig, portfolio manager, Quilter Investors, added: “The bigger question is going to be what impact this lockdown will have on long-run growth, particularly given the real unlocking of the economy doesn’t come until April.
“Rishi Sunak’s Budget last week set the tone of spend now and recoup later. However, he will need to watch these growth figures closely over the next few months as the last thing he will want to do is prematurely choke off the recovery at the exact point things begin to feel normal once more.
“That said, the Bank of England remains on hand to support the government in keeping the economy afloat, and it still has more room within its response to help. What is clear, however, is that we are in this recovery for the long haul, we just don’t quite yet know exactly how long that is going to be.”