Double-dip recession looms as third lockdown hits UK economy hard

Collapse in January activity in UK follows lacklustre December for retailers and a record deficit. Photo / Getty Images

Britain's third national lockdown has dealt the biggest blow to companies for eight months as a flood of dire economic news puts the UK on course for a double-dip recession.

The latest Chartered Institute for Procurement and Supply activity survey - where a score under 50 signals contraction - slumped to 40.6, the weakest since the depths of first lockdown in May.

The slide as school and non-essential shops closed in the face of the more virulent Covid variants did more damage than November's less severe shutdown, the data signalled.

Services took the most significant hit while manufacturing growth slowed to a crawl, hampered by Brexit supply issues and ports chaos. The difficulties triggered the biggest jump in delivery times in the 30-year history of the survey.

The latest gloomy figures come as businesses plead with the Chancellor to offer more support to the economy through an extension of reliefs and the Government's furlough scheme.

Chris Williamson, chief business economist at survey compiler 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."

Although optimism among firms is at a six-year high as the vaccine is rolled out, a bigger than expected hit is likely in the first quarter, according to JP Morgan economist Allan Monks.

He said: "The outturn does hint that the economic hit early this year could be larger than we have allowed for, with a greater reach to sectors less directly affected by restrictions such as manufacturing."

The overall fall was sharper than the 47.5 reading for private companies in the eurozone, which too is on course for a double-dip.

Retailers also suffered a lacklustre December after the new coronavirus strain forced stores to close their doors again in the second half of the month.

Sales rose 0.3pc compared to the previous month when the country was in full lockdown, a much weaker rebound from the 4.1pc plunge in sales suffered in November.

Retailers blamed the rapid return of tighter Covid restrictions. Sales were still up 2.9pc year-on-year and were 2.7pc higher than pre-pandemic levels in February, the Office for National Statistics revealed.

It came as government borrowing rocketed to £34.1bn in December, a record amount for the month and the third-highest in any month. It was the biggest widening of the deficit since May as the Chancellor splashed out to save jobs and businesses after the return of lockdown.

Borrowing was estimated at £271bn in the first nine months of the financial year, £213bn larger than the same period last year and the highest amount since comparable records began in 1993.

December is a crucial month for the retail industry when stores generate their biggest sales.

Clothing shops suffered a 25pc sales plunge over 2020 while food stores experienced record annual growth of 79pc.

Clothes enjoyed a sharp rebound in December but food sales dropped 3.4pc compared to November after supermarkets benefitted from the previous month's closures.

The national lockdown was lifted in time for the weeks leading up to Christmas before tough Tier 4 restrictions delivered more pain for shops.

Paul Dales, UK economist at Capital Economics, said it "wasn't a very merry Christmas for retailers", warning the weak sales "highlight how the economy still needs the Government's financial support".

"The poor performance is surely because many were forced to close again from 20th December as some regions were put in tier 4 Covid-19 restrictions," he said.