The UK economy recorded its worst economic performance for more than 300 years in 2020 as it reeled from the initial shock of the coronavirus crisis before staging a better than expected recovery later in the year.

Official figures on Friday showed that the UK produced 9.9 per cent fewer goods and services last year than in 2019, a contraction worse than the 1921 slump after the first world war and Spanish flu — and almost as bad as the contraction in great frost in 1709 when the UK was an agricultural economy.

But as companies and households learnt to live with Covid-19 lockdowns, economic performance improved during the year and Britain’s economy grew 1 per cent in the final quarter, the Office for National Statistics said.

The improved data in the fourth quarter encouraged Rishi Sunak, who said it showed “positive signs of the economy’s resilience over the winter”, adding in a BBC interview that there was a case for “cautious optimism” from the rollout of Covid-19 vaccines.

But in a warning that the March 3 Budget would not be just another giveaway, Sunak stressed that he needed to be “open and honest” with the public about “the need for sustainable public finances in the future”, hinting this would mean tax rises in due course.

Line chart of Annual % change showing UK economy suffers biggest contraction in three centuries

The UK’s economic performance in the Covid-19 crisis still looks weak by international standards, with output in the final quarter of last year 7.8 per cent below the pre-pandemic peak — twice the decline seen in Germany and three times that in the US.

The UK’s poor economic performance was the result of worse outbreaks of coronavirus than in most other countries, resulting in longer lockdowns and in households saving more of their income. On top of this, UK statisticians adopted different methods for measuring public sector output than other countries, which resulted in a larger recorded drop in output.

The ONS, however, said most of the UK’s poor performance relative to other countries was genuine rather than a statistical aberration. Rob Kent-Smith, head of GDP at the ONS, said even excluding public services, the decline up to the third quarter of 2020 was “still one of the largest in the G7”.

Line chart of Index, rebased showing UK business investment lags behind the UK

The UK’s weakness in 2020 stemmed from a more than 20 per cent slump during the first lockdown. The latest lockdown is likely to cause another dip at the start of this year but economists think it will be more muted and followed by a period of rapid recovery.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “We look for a hefty 6 per cent quarter-on-quarter rebound in GDP in the second quarter, followed by a 2.2 per cent increase in the third.” That could mean a “faster recovery than in other European countries, where the vaccine rollout has been much slower”, he added.

During the pandemic, most households’ incomes have held up in what has been the worst recession in more than a century because the government has borrowed more £400bn to protect jobs and livelihoods. These schemes are set to be extended in Sunak’s Budget although economists still expect unemployment to rise from below 4 per cent before the pandemic to 6.8 per cent by the end of this year.

Column chart of Q4 2020, annual % change showing Countries use different methods to calculate GDP

The ONS also reported a widening goods trade deficit in the last three months of 2020, driven by rising EU imports as businesses prepared for the end of the transition period.

In December, the economy expanded 1.2 per cent compared with the previous month. Although November’s figure was revised up 0.3 percentage points, the economy shrank 2.3 per cent that month as England entered lockdown.

“Loosening of restrictions in many parts of the UK saw elements of the economy recover some lost ground in December, with hospitality, car sales and hairdressers all seeing growth,” said Jonathan Athow, deputy national statistician for economic statistics.

Line chart of Index, 2018=100 showing UK GDP remains well below pre-crisis levels

Services rebounded strongest, rising 1.7 per cent in December compared with November. The manufacturing sector grew for the eighth consecutive month, but output in the construction sector fell for the first time since the spring.

Jonathan Gillham, PwC chief economist, said the figures were not as bad as had been expected and showed that “from an economic perspective, we are becoming more adaptable to being locked down”.