THE ECONOMY has shrunk by its fastest rate in a century as thousands of businesses have been forced to close due to the pandemic.

The latest Office for National Statistics figures show that GDP fell by 9.9 per cent in the last quarter - the largest fall since records began.

All key sectors - agriculture, production, construction and the services industry - have seen a drop in output, with the construction sector the worst hit . It contracted by 12.5% between October and December 2020.

The economy did register a 1.2% growth in December, staving off the threat of a double-dip recession.

Chancellor Rishi Sunak, who marks a year in his new role today, said the data showed the scale of the shock the UK had suffered as a result of the coronavirus.

Experts have warned that he must construct a clever and careful budget in March in order to lay a strong foundation for economic recovery.

ONS deputy national statistician for economic statistics Jonathan Athow said: “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. An increase in Covid-19 testing and tracing also boosted output.

“The economy continued to grow in the fourth quarter as a whole, despite the additional restrictions in November.”

The economy was helped in December by an easing of lockdown restrictions that had been in place in parts of the country in November. It was also aided by increased buying in the run-up to Christmas, and stockpiling ahead of the end of the Brexit transition period

The health sector grew by 2.4% after being involved with running coronavirus testing and tracing schemes across the UK.

Opposition politicians argue that Mr Sunak must change some of the current policies, such as furlough scheme, and provide greater support to sectors which are worst hit by Covid.

The Chancellor said: "Today’s figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world.

"While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.

“That’s why my focus remains fixed on doing everything we can to protect jobs, businesses and livelihoods.

“At the Budget I will set out the next stage of our Plan for Jobs, and the support we’ll provide through the next phase of pandemic."

SNP Shadow Chancellor Alison Thewliss said the UK Government must not use the situation to cut off "support or people's jobs, incomes and businesses at the time it is needed most."

She said: "Just when the UK economy has suffered a record slump, the Chancellor is threatening the recovery with damaging Tory austerity cuts that will hinder economic growth, make millions of people poorer and lead to rising unemployment. The UK is now among the worst performing countries in the OECD due to the decisions made by this Tory Government.

"Instead of imposing a public sector pay freeze, cutting Universal Credit and scrapping the furlough scheme prematurely, the Tories must rule out a return to austerity and commit to a major fiscal stimulus of at least £98billion to revive the economy."

James Smith, research director at think tank the Resolution Foundation, said the strength of the UK's economic rcovery would be "shaped by decisions taken at the upcoming budget."

He added: "That should include an extension, and gradual phasing out, of the furlough scheme, along with additional grants targeted at sectors most affected by continuing restrictions."

The Scottish Chambers of Commerce director Dr Liz Cameron said the "drip feeding" of support for businesses was leaving them struggling to plan more than a few weeks ahead at a time.

She explained: "There is little to cheer in the latest data. Despite avoiding a double-dip recession, output is still well below pre-pandemic levels. What these figures confirm is that 2020 was a historically bleak year for the UK economy.

“Modest growth at the end of 2020 is set to be followed by a substantial fall in output in the first quarter of this year as the current lockdown, the unwinding of Brexit inventories and disruption to UK-EU trade flows combine to suffocate activity.

"Many Scottish businesses have already encountered severe problems with the new EU – UK trading arrangements, particularly in our invaluable food & drink sector."

She said the vaccine offers some hope, but added: " The scarring caused by the pandemic is likely to crystallise as government support winds down. This as well as the prospect of persistent post-Brexit disruption means any recovery may be slower than the Bank of England currently predicts.

“The current drip-feed approach to support measures means firms cannot plan for more than a few weeks ahead and jobs in Scotland will continue to be lost without intervention. We need businesses to survive if the economy is to eventually recover.

"It is critical that the government swiftly implements a package of measures that support businesses and the economy for the whole of 2021, including removing the cliff-edges for business rate reliefs, VAT deferrals and furlough.”