After Months of Growth, U.K. Economy Shrinks as Lockdown Returns

The economy of the United Kingdom shrank by 2.6 percent in November as all four nations were placed under new tough lockdown restrictions to stem the second wave, official figures show.

After six consecutive monthly increases in gross domestic product (GDP) as the U.K. economy began to recover from the hit of the first wave, November GDP fell back to 8.5 percent below pre-pandemic levels in February 2020, compared with 6.1 percent below in October 2020, the Office for National Statistics (ONS) said. Pubs and hairdressers were particularly badly hit as the service sector shut down when Prime Minister Boris Johnson announced a second nationwide lockdown in England, alongside further restrictions in Northern Ireland, Scotland and Wales.

Some manufacturing and construction activity improved, the ONS said, but the hit to the service sector - which accounts for about three-quarters of the U.K. economy - meant it contracted by 3.4 percent in November and is now 9.9 percent below the pre-pandemic level. British Chancellor Rishi Sunak said the ONS report showed "it's clear things will get harder before they get better" and said that the figures "highlight the scale of the challenge we face."

Sunak said the vaccine roll-out and economic support measures announced in his autumn Spending Review 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.

Economists have warned the U.K. could see a double-dip recession if restrictions remain in place, as expected, for the first three months of 2021. But thanks to the good performance of the manufacturing and construction industries, many say the decline is not as bad as had been predicted.

Empty high street in Liverpool during lockdown
The service sector, which makes up a third of the U.K. economy, was badly hit by a second lockdown in England in November which saw non-essential shops, pubs, bars and hairdressers close Paul Ellis/Getty

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, many businesses adjusted to the new working conditions during the pandemic, such as widespread use of click and collect as well as the move online.

"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."

Ayush Ansal, chief investment officer at the London-based hedge fund, Crimson Black Capital, also said the fall in GDP "wasn't quite as bad as some had expected" given the lockdown measures in place. He said: "If Spring's economic collapse sank a saber-tooth fang into the GDP graph, it's clear there are plenty more sharp teeth to come as the economy stop-starts. Markets have priced in a jagged recovery and are now looking along the curve to how the economy reacts to mass vaccination. All eyes now are on the future rather than the past."

Ian Warwick, managing partner at Deepbridge Capital, said that despite the tough restrictions in place across the U.K., it doesn't appear to have badly impacted investor confidence. He said: "The dip in output for November will not come as a surprise as the majority of the country went into a second lockdown and we are likely to continue to see fluctuation as the economy continues to grapple with varying restrictions.

"In the meantime, however, it has been reassuring to witness that investor confidence remained positive during this period of tighter restrictions, particularly in the early-stage venture capital sector, with interest in Deepbridge's technology and life sciences companies seeing record inflows for quarter four."