The UK economy grew 7.5% last year, its strongest growth since the second world war, thanks to a rebound in the spring when lockdown restrictions eased.
According to the Office for National Statistics (ONS) on Friday, it was the biggest rise in 80 years, since 1941, and meant the UK also posted the fastest growth in the G7 after a 9.4% fall in GDP in 2020.
It beat growth in the US, which came in at 5.7%, both France and Germany at 7% and 2.7% respectively, and Italy at 6.5%.
“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,” chancellor of the exchequer Rishi Sunak said.
“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.”
He added: “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.”
However, the British economy contracted by 0.2% in December as the Omicron variant weighed on recovery, but it was a smaller contraction than economists expected.
Output in the service sector fell 0.5% during the month, while output in consumer-facing services slipped by 3%. This was mainly driven by a 3.7% decline in retail trade as consumers avoided physical stores amid the new COVID strain.
The data showed that production rose by 0.3% in December, while construction increased by 2%.
“Consumer focused services firms endured a difficult December as the emergence of Omicron and plan B restrictions triggered a renewed reluctance among consumers to socialise and spend,” Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said.
“Although 2021 was a record year for the UK economy, this more reflects data distortions caused by the comparison with the historic collapse in activity in 2020, than the reality on the ground.
It comes as the country faces rising inflation, soaring energy bills and higher taxes on consumers and businesses this year.
Paul Dales, chief UK economist at Capital Economics, said: “It's possible that GDP fell in January as that’s when omicron caused most people to stay off work and self-isolate. But equally, the timely indicators suggest that activity began to recover from the middle of the month.
“Either way, a 2% fall in real household disposable incomes this year (due to higher inflation and taxes) will restrain GDP growth from April.”
Overall, In the final quarter of the year, GDP increased 1%.
The ONS said: “The largest contributors to this quarterly increase were from human health and social work activities driven by increased GP visits at the start of the quarter, and a large increase in coronavirus testing and tracing activities and the extension of the vaccination programme.”
The news has now fuelled expectations of faster interest rate rises from the Bank of England (BoE).
Traders are betting on at least one 50 basis point increase by May, which would take the base rate to 1% from its current level of 0.5%.
Last week, Threadneedle Street doubled interest rates to 0.5% but cut its growth forecast from 5% to 3.75%. It also predicted that households were set to suffer the sharpest fall in living standards since records began three decades ago.
Jesús Cabra Guisasola, senior associate at Validus Risk Management, said: "The case for another rate hike from the BoE in March is already priced in by most market participants. Nevertheless, it will be important to observe by how much given there were four policymakers who wanted to act faster and voted for a 50bps hike during the February meeting to curb inflation expectations.
“Sterling could outperform both, the USD and EUR, if the BoE outstrips market expectations and hikes faster than expected.
"On the other hand, the pound could come under pressure if policymakers realise that multiple hikes would not solve a problem linked to other factors outside BoE’s control, such as higher energy prices and bottlenecks in the supply chain.”