By William Schomberg and Andy Bruce

LONDON (Reuters) – Britain’s economy shrank by less than feared in January when the country went back into a coronavirus lockdown, but trade with the European Union was hammered as new post-Brexit rules kicked in.

Gross domestic product was 2.9% lower than in December, the Office for National Statistics said.

Economists polled by Reuters had expected a contraction of 4.9% and government bond prices fell as investors took the data as a sign that the Bank of England was less likely to pump more stimulus into the economy.

Britain suffered its worst economic slump in three centuries last year when it shrank by 10%. It has also been hit with Europe’s biggest COVID-19 death toll of over 125,000 people.

But the country is racing ahead with vaccinations and, after Friday’s figures, economists said they expected the economy would shrink by 2% in the first quarter of 2021, half the hit forecast by the BoE only last month.

Many businesses are learning to cope with lockdowns, including retailers who have ramped up their online shopping operations and services firms that have tried to help workers to do their jobs from home.

Samuel Tombs, with Pantheon Macroeconomics, predicted a 5% second-quarter growth rebound “which would kibosh the chances of the Monetary Policy Committee reducing Bank Rate this year.”

The BoE looks set to keep its stimulus programmes on hold next Thursday.

The ONS figures also showed exports and imports from Britain to the EU plunged by the most on record, although there was a delay in gathering some of the data and there were signs of a pick-up towards the end of January.

Exports of goods to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7%. Imports fell by 28.8%.

Many companies brought forward imports to avoid border disruption from Jan. 1 onwards, and global trade flows have been hit by the coronavirus pandemic.

SERVICES HIT

The overall GDP figures were hit hard by the impact of social distancing rules on Britain’s huge services sector.

“The economy took a notable hit in January, albeit smaller than some expected, with retail, restaurants, schools and hairdressers all affected by the latest lockdown,” Jonathan Athow, an ONS statistician, said.

Manufacturing fell for the first time since April with car production down sharply.

But ING economist James Smith pointed to the boost to GDP from Britain’s COVID-19 health policy response: “What really stands out is health expenditure, where the ramping up of the government’s test and trace scheme and vaccine programmes added 0.9% to the GDP figures alone.”

The economy remained 9% smaller than in February last year, before the pandemic hit.

Prime Minister Boris Johnson plans to ease England’s coronavirus restrictions gradually before lifting most of them by late June.

Growth in the next few months is also likely to get a boost from finance minister Rishi Sunak’s announcement last week that he will pump a further 65 billion pounds ($90.6 billion) into the economy, including an extension of his jobs-protecting furlough scheme.

The ONS said services output shrank by 3.5% in January from December. The Reuters poll had pointed to a 5.4% contraction.

($1 = 0.7174 pounds)

(Reporting by William Schomberg; Editing by Alistair Smout, Philippa Fletcher and John Stonestreet)