The UK economy grew by a record 7.5 per cent in 2021 as it bounced back from the Covid pandemic but contracted in December after the Omicron variant hit Britain.
GDP fell by 0.2 per cent in December - a smaller drop than economists expected but still a marked slowdown compared to the 0.9 per cent rise recorded in November.
The official figures indicate that while the UK economy is now largely back to pre pandemic levels having recorded the biggest drop in GDP of any G7 economy in 2020, the outlook for the next two years is less encouraging.
With inflation set to soar to more than seven per cent by April, energy bills rising sharply and tax rises on the way, economists fear spending will fall, holding back the economy even as it throws off the remaining Covid-19 restrictions.
The Bank of England’s Monetary Policy Committee downgraded its forecasts for the economy last week, predicting that while growth is expected to return in February it will be flat across the first quarter of the year as a whole.
Darren Morgan, Director of Economic Statistics for the Office for National Statistics, explained that retail and hospitality sectors were hit the hardest as the Omicron wave surged in December. Output in consumer-facing services fell by 3 per cent in the month, mainly driven by a 3.7 per cent fall in retail trade. Hospitality fell by more than 9 per cent.
But Mr Morgan added these were partially offset by an increase in activity in the health sector.
“Despite December’s setback, GDP grew robustly across the fourth quarter as a whole with the NHS, couriers and employment agencies all helping to support the economy,” he explained.
Growth in the fourth quarter of 2021 was flat at 1 per cent, the ONS said, meaning quarterly GDP is now 0.4 per cent below pre-pandemic levels. But the overall annual figure of 7.5 per cent for 2021 was a post-war high, beating the previous record of 6.8 per cent.
However economists pointed out that this was due to the sheer scale of the drop seen in 2020 as the UK economy shut down to tackle the devastating initial waves of the pandemic.
Simon French, Chief Economist at Panmure Gordon, tweeted: “2021 UK GDP growth of +7.5 per cent does indeed make it fastest growing economy in G7.
“But two caveats that will get drowned out: At -9.4 per cent the U.K. had the largest 2020 GDP fall so had furthest to rebound.”
He added that the current quarterly rate of growth of around 1 per cent was “mid-range” for the G7 economies, countering the Government’s claims that Britain has the fastest growth rate of any advanced economy.
Rain Newton-Smith, Chief Economist at the Confederation of British Industry, described the end of last year as “lacklustre” and warned: “While the worst of the impact appears to be over, firms are still grappling with supply shortages and cost pressures, while households are facing a looming cost of living crisis.
“We’re caught in a low growth trap, and the only way to get out is a relentless focus on competitiveness.”
Yaelâ¯Selfin, Chief Economist at KPMG UK, added: “We expect economic growth to pick up from this month, with overall GDP growth in 2022 reaching 3.7 per cent around half the rate of last year.
“However, given the squeeze on household incomes from rising prices and the higher tax burden, performance could disappoint over the coming months.”
Despite the gloomy forecasts, Chancellor Rishi Sunak remained upbeat. He said: “Thanks to our £400bn package of support and making the right calls at the right time, the economy has been remarkably resilient; with the UK seeing the fastest growth in the G7 last year and GDP remaining at pre-pandemic levels in December.
“I’m proud of the resolve the whole country has demonstrated, and proud of our incredible vaccine programme which has allowed the economy to stay open.
“We’re continuing to help the economy rebuild through our Plan for Jobs, boost for business investment and support for households with the cost of living.”
But Shadow Chancellor Rachel Reeves highlighted new analysis by Labour which suggests the UK is set to be hit by the biggest downgrade of any G7 economy compared to IMF forecasts made over a decade ago.
She said: “Our economy suffered the worst economic crisis of any major economy, and without urgent action the UK risks being stuck in a cycle of low growth and high taxes.
“We need a stronger economy to achieve prosperity in every part of the country, and so that the NHS and our other great public services have the funding they need in the years to come.”
New research by Labour says the BoE’s prediction that the UK economy will grow by 1.5 per cent next year is a -1.2 per cent downgrade on previous predictions of 2.3 per cent made by the IMF in 2010.
That, the party says, is three times greater than the -0.4 per cent downgrade forecast for Canada and six times greater than Japan - the only other advanced economies predicted to experience a downgrade between 2011-23.
