British Economy, Post Brexit and Pummeled by Covid, Is Worst in G-7
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
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
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
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 firstname.lastname@example.org
(END) Dow Jones Newswires
January 25, 2021 10:52 ET (15:52 GMT)
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