The sudden emergence of the fast-spreading Omicron variant of the coronavirus in Britain late last year stalled the country’s economic recovery, data confirmed on Friday, though the impact was milder than expected.
Britain’s gross domestic product fell 0.2 percent in December from the previous month, the Office for National Statistics said, as the government told people to work from home where possible. High case numbers and voluntary social distancing led to a wave of cancellations for restaurants, bars, theaters and other social activities. Economists surveyed by Bloomberg forecast, on average, a 0.5 percent decline in economic output.
The data adds to evidence that successive waves of the coronavirus are less virulent, both in terms of severity of the disease, as vaccinations are increasingly widespread, and to the economy. The economic impact of Omicron was smaller than that of previous surges in virus cases as restrictions were also looser. For example, in January 2021, Britain’s economy contracted nearly 3 percent as the country went into a tight lockdown.
Last year’s economic recovery was choppy. An early boost from reopening in the spring eventually slowed into more middling growth in the second half of year when virus case numbers were high, supply chain bottlenecks impeded businesses and exports declined. Still, the economy grew 7.5 percent in 2021, its fastest pace since 1941, as it rebounded from a 9.4 percent slump the previous year.
By the end of last year, the British economy matched its prepandemic size. The recovery was propelled forward by activity in health services as billions of pounds were spent on test and tracing virus contacts. Consumer-facing services, such as restaurants, bars, travel and entertainment, were still more than 8 percent below their prepandemic level.
Britain is trying to move into a new phase where coronavirus is considered endemic. Prime Minister Boris Johnson said this week that he wanted to remove the remaining Covid rules, including the legal requirement to self-isolate for positive cases, as soon as this month. But in this postpandemic phase where the economic impact of coronavirus is waning, there is another economic challenge created by high energy prices and rapid inflation.
Price gains are expected to peak above 7 percent in April but wages aren’t keeping up, energy bills are rising and tax increases are scheduled. The squeeze on household budgets is expected to dampen consumer spending and weigh on the economy in the second half of the year.
“The Omicron wave has only briefly stalled the U.K.’s strong economic recovery, which should be more stable from here on in,” James Smith, the research director at the Resolution Foundation, a think tank focusing on living standards in Britain, said in a statement. This will allow policymakers to concentrate on the “more urgent cost-of-living crisis that Britain is experiencing.”
The Bank of England has already raised interest rates twice in the past two months in an effort to cool down the economy. “We have not raised interest rates today because the economy is roaring away,” the bank’s governor, Andrew Bailey, said last week after announcing the second rate increase. The move was necessary to try to bring inflation back down to the bank’s 2 percent target, and more rate increases are likely in the coming months, he said.
The central bank expects the British economy to grow about 3.75 percent this year. It lowered its forecast from 5 percent in November as household income growth, once adjusted for inflation, is expected to be negative for the next two years.