By Jason Douglas and Andrew Barnett 

The U.K.'s economy shrank more last year than any of the G-7, in what the Bank of England says will be the country's biggest economic slump in more than 300 years.

What went wrong? Shutdowns caused greater pain for the U.K. than other members of the Group of Seven advanced economies in part because it is especially dependent on consumer spending, which evaporated amid one of Europe's deadliest Covid-19 outbreaks. The economy was already weak after the four years of negotiations over Britain's exit from the European Union, during which business investment sagged and households held back on spending.

This is the starting point for Britain's new relationship with the EU, which began Jan. 1 with a loose free-trade agreement. Earlier this month, Prime Minister Boris Johnson announced another nationwide lockdown to fight a new, more-contagious variant of the coronavirus. That puts the U.K. economy on course to shrink again in the first quarter of the year, when businesses must also get to grips with new European trading arrangements.

Growth in the U.K. was already weak going into the pandemic because of feeble business investment, poor productivity and scant growth in incomes. Once the coronavirus set in, the British economy shrank by more than its peers in the G-7 in the first nine months of the year. Figures for the final quarter, due Feb. 12, are expected to show the economy contracted again.

The U.K. took a bigger hit because around 13% of its annual gross domestic product comes from spending on recreation and culture and in restaurants and hotels, a higher share than any other G-7 country. Businesses that depend on direct contact with consumers -- bars and restaurants, sports events, hotels and theaters, cinemas and museums -- were hobbled when social distancing became the norm and when the spread of the virus forced them to close. The current lockdown, in place through mid-February, closes schools and nonessential shops, and people have been told to leave home only if necessary.

The U.K. locked down its economy later than its peers and kept tighter restrictions in place when others were easing them.

Despite the lockdowns, the U.K. struggled to keep cases under control, reinforcing people's hesitation to spend and travel.

Overall infection numbers in the U.K. show it to be one of the worst-affected countries by the pandemic, with about 3.7 million cases and more than 98,000 deaths as of Monday. The more-infectious variant of the virus is pushing up hospitalizations and prompting a new wave of restrictions. The U.K. was, though, the first Western country to approve a coronavirus vaccine, and so far 6.4 million people have received at least one vaccine shot.

The stubbornly high case numbers meant that in the U.K., visits to supermarkets and workplaces and trips on public transit suffered more than in other G-7 countries, intensifying the economic damage.

Since 2016, when the country voted in a referendum to leave the EU, uncertainty about the future economic relationship with the bloc has weighed on growth. Britain has lagged behind most of its peers in business investment, as companies considered whether the U.K. was the right place to invest for reaching European customers. Britain experienced one of the largest drops in this crucial engine of growth during the pandemic, suggesting the twin uncertainties of Brexit and the virus dented the U.K.'s attractiveness as a place to invest.

Consumer spending in the U.K. also lagged behind its peers after the referendum and took a steep dive during the pandemic. Behind the slow growth is a decade of paltry wage increases and rising prices after Brexit hit the pound, squeezing household incomes.

Some economists think the U.K.'s poor performance might be overstated, because the pandemic has made it especially hard to estimate growth, inflation and other economic indicators. Strip out changes in prices over 2020, and the U.K. economy doesn't look as bad compared with its peers. Some economists think quirks in the way the U.K. calculates up the value to the economy of health and education may help explain the U.K.'s relative underperformance.

Britain has shown resilience in other ways. Government support for firms and workers battered by the virus has helped keep unemployment low relative to previous recessions. The Bank of England has pledged to keep interest rates pegged close to zero, or below, to fuel a durable recovery. And the prime minister said the late-December trade pact governing the new relationship with Europe will ease economic uncertainty and puts the economy on a better footing to recover from the pandemic.

Write to Jason Douglas at


(END) Dow Jones Newswires

January 25, 2021 10:52 ET (15:52 GMT)

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