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Fears of UK double-dip recession rise as activity slumps in Covid-19 lockdown

Larry Elliott Economics editor
·4-min read
<span>Photograph: Dominic Lipinski/PA</span>
Photograph: Dominic Lipinski/PA

Fears that the UK economy is facing a double-dip recession have intensified after a poor Christmas for retailers was followed by a slump in activity in January as tougher lockdown measures took effect.

In a triple-whammy of bad news for the chancellor, Rishi Sunak, official figures showing weak consumer spending and the third highest monthly borrowing on record were accompanied by evidence that the UK’s private sector had fallen this month to its lowest level since May.

The IHS Markit/Cips monthly healthcheck of the economy showed the service sector – which accounts for 80% of the economy – being especially hard hit by the enforced closure of non-essential retailing, hospitality and leisure.

Activity dropped from 49.4 in December to 38.8 in January. Any reading below 50 means activity is falling. Even though factories have remained open, the manufacturing sector also suffered in January from a mixture of Covid-19 effects and Brexit disruption, with its reading falling from 57.5 to 52.9.

Chris Williamson, the chief business economist at IHS Markit, said: “A steep slump in business activity in January puts the locked-down UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards.”

Analysts at the investment bank Investec said the PMI falls supported their forecast of the economy contracting by 2.5% in the first quarter of 2021. If official figures also show the economy contracted in the last quarter of 2020, then the UK will have suffered its first double-dip recession – two downturns in quick succession – since the 1970s. A recession is defined as two consecutive quarters of negative growth, which the UK economy experienced in the first and second quarters of last year.

Meanwhile, UK government borrowing hit its highest for December on record as spending soared in response to the coronavirus pandemic and tax receipts fell. .

The Office for National Statistics said borrowing reached £34.1bn last month, about £28bn more than the same month a year ago.

The increase took the government’s budget deficit – the gap between spending and tax income plus other receipts – to nearly £271bn for the first nine months of the financial year, a rise of more than £212bn compared with the same period last year.

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The Office for Budget Responsibility, the independent forecasting unit, has estimated borrowing will hit £394bn by the end of the financial year in March, which would be the highest peacetime deficit in history. Borrowing is already higher than during the worst of the 2008 financial crisis.

The latest rise in borrowing comes as government spending climbed in response to the second wave of the pandemic. The bill for coronavirus job support schemes, including the furlough scheme, in December was £10bn. There was also a bill of £9bn for vaccines, testing and PPE. Total spending was £86bn.

Charlie McCurdy, a researcher at the Resolution Foundation thinktank, said: “This level of spending may be eye-wateringly large, but it is absolutely necessary in order to both tackle the virus, and protect families and firms from the crisis.”

Separate ONS figures said the volume of British retail sales rose by 0.3% between November and December after the relaxation of the second national lockdown in England – far below economists’ forecasts for growth of 1.2% during the pivotal month for retailers.

For the year as a whole, retail sales plunged by 1.9% as the coronavirus pandemic triggered the biggest annual decline on record despite a boom in spending online during lockdown.

According to the latest snapshot, spending in clothing stores jumped by 21.5% as consumer spending recovered from a large decline in November, when much of the high street was closed. Retailers reported a rise in sales at the beginning of the month as people shopped for Christmas presents before tougher restrictions were introduced and Boris Johnson’s government made a last-minute decision to scrap Christmas bubble measures for large parts of the country.

Despite the sharp rise in spending on fashion over the festive period, food sales shrank by 3.4%, falling back from a strong growth rate of 2.8% in November when supermarkets had benefited from the closure of pubs, restaurants and other non-essential retailers.

The figures come at the end of the worst year for the high street on record in terms of revenue growth. Growing numbers of retailers have faced financial ruin during the pandemic, leading to widespread store closures and job losses across the country.

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