By David Milliken and William Schomberg

LONDON (Reuters) – British manufacturers reported their slowest output growth since May last month, hit by Brexit and COVID-19-related delays, and consumers cut back heavily on borrowing in January as they returned to lockdown.

Britain’s economy is set to shrink sharply in early 2021 though manufacturers are upbeat about prospects later in the year, when they expect lockdown restrictions to end.

The speed of the recovery for households will also be critical. Bank of England data showed consumer borrowing in January suffered its biggest annual decline since records began in 1994, sliding 8.9%.

Britain entered a third national lockdown in January, closing schools, non-essential shops, restaurants and most other businesses open to the public, though people can still travel to work if needed.

Finance minister Rishi Sunak has announced an extra 5 billion pounds ($7.0 billion) of support for services firms and plans to offer more aid in an annual budget on Wednesday.

“All eyes are now on Wednesday’s budget to see if the chancellor has any surprises up his sleeve that will give the (manufacturing) industry’s businesses a boost for the latter part of the year,” said Simon Jonsson, a partner at accountants KPMG.

The BoE expects the economy to shrink 4% in the first three months of 2021 – a sharper decline than during any quarter of the 2008-09 financial crisis though much less than the 20% drop last spring.

The weak consumer borrowing suggests a slump in spending on non-essentials. Official retail sales data showed overall purchases fell by 8.2% in January.

Some of the weak borrowing also reflects repayment of loans by better-off households.

The BoE expects pent-up household savings to be unleashed when lockdowns end, but the scale of any bounce is uncertain.

Manufacturing has fared better than consumer-facing sectors. Nonetheless, February’s IHS Markit/CIPS Purchasing Managers’ Index (PMI)’s key output component showed growth slipped further after a sharp drop in January.

“Continued COVID-19 related disruption, now exacerbated by manufacturers’ cautious navigation of the new UK-EU trading arrangement, has created a scenario in which logistical and supply-side challenges are limiting the rate of economic recovery,” said James Brougham, an economist at industry body Make UK.

The broader manufacturing PMI touched a two-month high of 55.1, slightly higher than suggested by a preliminary reading.

However, much of the rise reflects longer delivery times and higher costs – which historically were linked with increased activity but more recently have represented a constraint.

Confidence for the year ahead was its highest in more than six years. This is despite new post-Brexit customs rules which took effect in January and increased the cost and complexity of trade with the European Union, especially for smaller firms.

Materials costs rose at the fastest rate in four years and delivery times lengthened sharply too.

($1 = 0.7164 pounds)

(Reporting by David Milliken and William Schomberg; Editing by Hugh Lawson)