UK Markets closed
  • NIKKEI 225

    +50.84 (+0.19%)

    -619.17 (-2.73%)

    -1.87 (-2.35%)

    -6.60 (-0.34%)
  • DOW

    -260.99 (-0.77%)

    -999.47 (-5.17%)
  • CMC Crypto 200

    -22.91 (-4.26%)
  • Nasdaq

    -227.90 (-1.96%)
  • ^FTAS

    +6.19 (+0.15%)

UK economy shrank by record 10% in 2020

The UK economy shrank by 9.9% in 2020 as the COVID-19 pandemic ravaged the economy.

New data published by the Office for National Statistics (ONS) on Friday showed GDP declined by 9.9% last year, which was the largest contraction on record.

The slump came after a historic recession at the start of the year, caused by the onset of the COVID-19 pandemic in February and March. The economy began to rebound in the third quarter but remains 7.8% smaller than it was at the end of 2019, the ONS said.

The annual slump wiped out seven years-worth of growth, taking the UK economy back to the size it was in 2013.

"Today’s figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world," Chancellor Rishi Sunak said.

"While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses."

WATCH: UK GDP shrinks by record 10%

The UK barely escaped shrinking at the end of 2020. The Office for National Statistics said UK GDP grew by 1% in the fourth quarter of 2020. The performance was in-line with City forecasts.

READ MORE: UK announces £20m SME Brexit support fund

The near-flat performance at the end of last year followed growth of 16% in the third quarter of the year, as the UK economy recovered from its steepest crash in 300 years. The sharp recession was caused by the COVID-19 pandemic, which brought large parts of the economy to a standstill for months from March onwards.

A return to lockdown in November, followed by heavy restrictions on activity in December, meant many economists initially believed UK GDP would once again decline in the final quarter of 2020. But businesses have learned to adapt to COVID-19 restrictions and coped better than they had with March's initial shutdown.

The ONS said GDP grew by 1.2% month-on-month in December, which was slightly better than forecast.

The path of monthly UK. Photo: Yahoo Finance UK
The path of monthly UK. Photo: Yahoo Finance UK

As recently as last month economists were predicting a double-dip recession for the UK, believing GDP had contracted in final quarter of 2020 and would do so again in the first quarter of 2021. Friday's confirmation that the economy escaped decline at the end of last year puts the UK on a path to avoid this fate. It would have marked the first double-dip recession — two recessions in swift succession — since the 1970s.

Another strict and lengthy lockdown at the start of 2021 means the economy is likely to shrink over the first three months of 2021.

READ MORE: Amsterdam overtakes London as Europe's share trading hub

"At the Budget I will set out the next stage of our Plan for Jobs, and the support we’ll provide through the next phase of pandemic," Sunak said on Friday.

Economists are optimistic that activity can quickly rebound once restrictions start to ease. Bank of England governor Andrew Bailey last week said the rollout of vaccines should help the economy "recover rapidly" in the second half of this year.

Tej Parikh, chief economist at the Institute of Directors, on Friday said March's Budget would be "a crucial factor in determining just how strongly the economy can bounce back."

"An extension to existing coronavirus economic support, particularly the furlough scheme, will provide a vital cushion for businesses while the economy remains fragile," Parikh said. "The government should also provide forward guidance on its strategy for reopening the economy, to help firms with their planning in the here and now."

WATCH: Why can't the government just print more money?