UK Economy Shrank By 2.6% In November As Services Suffered

The UK economy shrank by 2.6% in November as England was placed in lockdown for a second time, official figures show.

The Office for National Statistics said it meant gross domestic product was 8.5% below its pre-pandemic peak.

November's decline came after six consecutive months of growth.

Pubs and hairdressers were badly hit as the service sector suffered, the ONS said, but some manufacturing and construction activity improved.

The hit to the service sector - which accounts for about three-quarters of the UK economy - meant it contracted by 3.4% in November, and is now 9.9% below the level of February 2020.

Some economists said the November figure was better than expected, and it appeared many companies were better prepared for the second lockdown, with some sectors staying open for business and many firms having already put in place plans to expand online operations.

"Steps taken by businesses earlier in the year to Covid-proof their operations - combined with the time-limited nature of the restrictions, and schools remaining open - meant more companies were able to continue trading safely," said Alpesh Paleja, lead economist at the CBI employers' group.

Chancellor Rishi Sunak said the figures showed "it's clear things will get harder before they get better and today's figures highlight the scale of the challenge we face".

But he said the vaccine roll-out and economic support measures meant there were reasons to be hopeful. "With this support, and the resilience and enterprise of the British people, we will get through this," he said.

Shadow chancellor Anneliese Dodds said the figures showed the UK has an economic "mountain to climb".

Speaking to the BBC, she said it would be a "serious mistake" if Mr Sunak waited until the Budget in March before providing more support and confidence for business.

ONS director for economic statistics Darren Morgan said: "The economy took a hit from restrictions put in place to contain the pandemic during November, with pubs and hairdressers seeing the biggest impact."

However, he said many firms adjusted to the new pandemic working conditions, such as by expanding click and collect and other online operations.

He added: "Manufacturing and construction generally continued to operate, while schools also stayed open, meaning the impact on the economy was significantly smaller in November than during the first lockdown.

"Car manufacturing, bolstered by demand from abroad, housebuilding and infrastructure grew and are now all above their pre-pandemic levels." Construction activity grew by 1.9% during the month.

Gross domestic product (GDP) is the sum (measured in pounds) of the value of goods and services produced in the economy.

But the measurement most people focus on is the percentage change - the growth of the country's economy over a period of time, typically a quarter (three months) or a year.

If the GDP measure is up on the previous three months, the economy is growing. That generally means more wealth and more new jobs.

If it is negative, the economy is shrinking.

Despite the GDP figure being better than some analysts had forecast, there are still concerns that the UK could be heading back into recession.

Economists have warned the UK could see a double-dip recession if restrictions remain in place in the first three months of 2021.

Rory Macqueen, from the National Institute of Economic and Social Research, said the November figures confirm a significant slowdown in the last quarter of 2020, "despite November's lockdown in England clearly having a far smaller effect than the first".

James Smith, research director of the Resolution Foundation, said there would be a lot of comment about whether these figures point to the UK heading for only its second-ever double-dip recession on record.

But, he said, the real "story of the year will be a vaccine-driven bounce back in economic activity for sectors like hospitality and leisure".

"The chancellor must do everything he can to support that recovery once public health restrictions ease," he added.

Analysts at Capital Economics also said there was cause for optimism, saying that the current third lockdown could have less impact than feared.

"The economy has built up a fair bit of immunity to lockdowns, as November's lockdown was much less painful for the economy than the first lockdown.

"As a result, the Covid-19 economic hole is smaller than we thought, the economy may get back to its pre-crisis crisis level a bit sooner and it makes us more confident that the Bank of England probably won't resort to negative interest rates."

The fall in the economy in November was still considerable, but the figures show businesses adapting to difficult conditions. The hit was a fraction of what occurred in the first lockdown last April, and was mainly confined to the service sector, with pubs and hairdressing for example in sharp decline.

Manufacturing and construction largely remained open, as did previously shut public services such as schools. By November car manufacturing and house building were back above the level of output before the pandemic.

The trade figures also showed a £7bn increase in EU imports in the three months to November as traders stockpiled car parts, medicines and other goods ahead of the end of the Brexit transition period.

The renewed regional tiered restrictions in December, and more severe national lockdowns this month, still indicate a possible return to overall recession in this tough winter.

Business groups continue to argue that extra support is required to support jobs and cash flow well before the Budget in March. But a more sustained lifting of restrictions as vaccines are rolled out should see growth return after the spring.