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U.K. Economy Suffers Biggest Slump in 300 Years

LONDON—The U.K. economy recorded its biggest contraction in more than three centuries in 2020, according to official estimates, highlighting the Covid-19 pandemic’s economic toll on a country that has also suffered one of the world’s deadliest outbreaks.

Though the U.K. is grappling with a new, highly contagious variant of the coronavirus, Prime Minister Boris Johnson is hopeful that a rapid vaccination drive will permit a gradual reopening of the economy in the coming months, paving the way for a consumer-driven rebound later in the year.

Gross domestic product shrank 9.9% over the year as a whole, the Office for National Statistics said Friday, the largest annual decline among the Group of Seven advanced economies. France’s economy shrank 8.3% and Italy’s contracted 8.8%, according to provisional estimates. German GDP declined 5%. The U.S. shrank 3.5%.

However, the data showed the U.K. economy grew at an annualized rate of 4% in the final quarter of the year, aided by government spending and a small uptick in business investment.

The decline in U.K. GDP in 2020 was the largest in more than 300 years, according to Bank of England data, though the preliminary estimate is likely to be revised. BOE data shows the economy last recorded a comparable drop in 1921, when it shrank 9.7% during the depression that followed World War I. The economy last recorded a bigger contraction in 1709, when it tumbled 13% during an unusually cold winter known as the Great Frost.

Britain was hit especially hard in the second quarter of 2020 as a nationwide lockdown took effect. Social distancing and the closure of restaurants, bars, hotels and theaters were painful for the economy, where a higher share of national income is spent on recreation and similar services that require face-to-face contact than in other comparable economies.

Pandemic Slump

A preliminary estimate shows the the U.K. economy experienced its largest fall in output in 2020 in more than 300 years.

U.K. annual GDP, change from previous year

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1706: Spanish War of Succession

1709: Great Frost

1921: Post-WWI depression

1931: Great Depression

2009: Financial crisis

2020: Covid-19 pandemic

The U.K. also kept restrictions on daily life and the economy in place for longer than some of its peers as it struggled to bring down Covid-19 case loads, limiting the extent of its post-lockdown recovery in the summer. The U.K. has suffered one of the worst Covid-19 outbreaks, with more than 120,000 deaths linked to the virus and at least four million people infected. On a per-capita basis, the death toll in the U.K. is higher than the U.S. and other hard-hit large countries including Italy, France and Brazil.

The U.K. has, however, raced ahead of many other advanced economies in the speed of its vaccine rollout, putting it on course for a speedier recovery, according to economists. British regulators were the first in the West to authorize a coronavirus vaccine in early December. Data through Thursday shows the U.K. has given at least one dose of vaccine to around a fifth of its population. That compares with 14% in the U.S. and 4% in France and Germany.

The Bank of England said this month that it expects a sharp rebound in consumer spending in the second half of the year. Government support programs have kept a lid on job losses and supported household incomes. Andrew Haldane, the U.K. central bank’s chief economist, has likened the economy to “a coiled spring” ready to release pent-up spending. Mr. Johnson is due to set out plans for a phased reopening of the economy later this month.

As new coronavirus variants sweep across the world, scientists are racing to understand how dangerous they could be. WSJ explains. Illustration: Alex Kuzoian/WSJ

Progress with the vaccination drive means some businesses are starting to look forward to a revival later this year, and a strong 2022.

The arts-and-entertainment sector, for instance, was particularly hard hit during the pandemic, with output down almost two thirds in December compared with February last year, the month before the pandemic changed the direction of the U.K. economy.

Britain’s Covid-19 Battle

“It feels to me that we will be back up and running in May,” said Tim Richards, chief executive of Vue International, which operates cinemas in nine European countries, including the U.K. He said he believes his cinemas can expect a burst of activity as a backlog of blockbusters hits the screens this year.

“We are going to be squeezing three years of movies into a 12-to-18-month period,” he said.

In the short term, economists expect a rocky few months. A resurgent epidemic, fueled by a highly contagious variant of the virus that has since spread around the world, led Mr. Johnson to tighten restrictions first in November and then impose another nationwide lockdown in early January.

Economists expect the economy to shrink again in the first quarter now the new lockdown is in place. First-quarter activity is also expected to take a hit from Brexit, as companies grapple with new customs procedures and other barriers to trade with the European Union that came into force at the end of the year.

The depth of the U.K. slump also means it has more ground to make up to recover the losses experienced during the pandemic. Its economy at the end of the year was 7.8% smaller than it was at the close of 2019 before the coronavirus swept the world. That compares with a shortfall of 5% in France, 3.9% in Germany and 2.5% in the U.S.

Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com

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