UK economy shrinks more than expected in first quarter

Output contracted by 1.6% as people saved at record levels

The London skyline. UK economic output dropped when England went into its third lockdown in early January, with similar restrictions in other parts of the country. Getty

Britain's coronavirus-ravaged economy suffered a bigger hit than expected in the first quarter of this year, before lockdown restrictions began to ease, revised official data showed on Wednesday.

Gross domestic product contracted by 1.6 per cent between January and March, down from the previous figure of 1.5 per cent, according to the Office for National Statistics, with households stockpiling cash while spending options were curtailed.

"Today's updated GDP figures show the same picture as our earlier estimate, with schools, hospitality and retail all hit by the reimposition of the lockdown in January and February, with some recovery in March," said Jonathan Athow, ONS deputy national statistician.

This means GDP was 8.8 per cent below its pre-pandemic levels at the start of the year, slightly higher than the initial estimate of 8.7 per cent.

Despite this upwards first-quarter revision, the contraction was far less severe than the 20 per cent slide in output recorded during the first lockdown in Spring 2020.

The updated ONS data also showed that households stockpiled cash at the start of the year, with the household saving ratio increasing to 19.9 per cent, compared with 16.1 per cent in the previous quarter.

"With many services unavailable, households again saved at record levels,” said Mr Athow.

England went into its third lockdown in early January, with similar restrictions in other parts of the country before the curbs began to ease at the start of March with the reopening of schools.

Under a phased reopening, restaurants and cafes restarted outdoor dining in April and indoor services in May, while non-essential retail stores also opened up in April.

Monthly GDP figures since January have indicated that the economy is on track for a healthy recovery, with GDP rising 0.8 per cent and 2.4 per cent, respectively, in February and March and by 2.3 per cent in April.

The economy is expected to fully reopen on July 19, after the government delayed the date by four weeks due to surging Delta-plus infections. However, the high vaccination rate is helping to reduce the number of hospital admissions and deaths.

Britain's economy shrank by 9.8 per cent in 2020, when the country suffered its worst contraction in more than 300 years, one of the weakest performances among major global economies during the pandemic.

However, S&P Global Ratings said in May that Britain’s sharp economic contraction last year would contribute to a stronger recovery in growth numbers this year and next.

The Bank of England upgraded its 2021 growth forecast in May from 5 per cent to 7.5 per cent, a move predicated largely on a strong bounce-back in consumption.

Paul Dales, UK economist at Capital Economics, said the small downward revision to first-quarter GDP growth “won't stop the economy from rising back to its pre-pandemic peak in the coming months”.

"And the larger rebound in the household saving rate increases the potential for faster rises in GDP further ahead,” he said.