By David Milliken and William Schomberg
LONDON (Reuters) -Britain suffered a smaller economic hit than feared in December as COVID-19 cases mounted, capping a historic two-year collapse and rebound for the world's fifth-biggest economy, but surging inflation is set to slow the recovery in 2022.
Gross domestic product (GDP) fell 0.2% in December - as many people worked from home and avoided Christmas socialising due to the Omicron coronavirus variant - following growth of 0.7% the month before, official data showed.
Economists polled by Reuters had forecast a 0.6% monthly fall.
The quarterly pace of expansion held steady at 1.0%, helped by the public health service, couriers and employment agencies.
December GDP matched its level in February 2020, just before the pandemic struck. Output in the fourth quarter was slightly below that in the final three months of 2019.
The economy grew 7.5% in 2021 - the biggest annual rise since 1941, when Britain was rearming during World War Two - after a 9.4% collapse in 2020, the largest since the aftermath of World War One.
The slump and rebound are the biggest among the Group of Seven rich nations, in part reflecting Britain's high number of COVID-19 deaths and reliance on consumer-facing services but also different conventions for measuring public-sector output.
COVID-19 infections have fallen sharply since the turn of the year and the Bank of England expects output, measured on a quarterly basis, will return to its pre-pandemic size by the end of March.
The central bank sees much greater headwinds from fast-rising inflation, which it expects to peak at a 30-year high of around 7.25% in April when domestic power tariffs will leap.
"The UK economy is facing a materially weaker 2022 as the crippling burden of rising inflation, soaring energy bills and higher taxes on consumers and businesses dampens activity," Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said.
The BoE has raised interest rates twice since December and investors are pricing in rates of 2% by the end of this year.
The BCC called on the government to scrap a planned rise in payroll taxes levied on workers and businesses - something finance minister Rishi Sunak has repeatedly ruled out.
SERVICES WITHOUT A SMILE
Services output fell 0.5% in December, driven by a 3.0% fall in consumer-facing services such as retail and hospitality. Output for consumer-facing services is still more than 8% below its pre-pandemic level.
Stripping out greater spending on healthcare, overall GDP would still be more than 1% below its pre-pandemic level.
Separate data showed Britain's trade deficit in goods and services widened to 28.8 billion pounds ($39.1 billion) last year from a 2.9 billion-pound surplus in 2020, although 2021's figure was broadly in line with deficits from 2015-2018.
Britain's goods trade deficit with the European Union fell to 70.2 billion pounds, its lowest since 2013, during the first year that new trading arrangements with the EU took effect.
British goods exports to the EU halved in January 2021, due to temporary disruptions from new customs arrangements and stockpiling in the months before. They are now broadly back at pre-Brexit levels, while imports are some way below.
Some economists warn that the drop in overall trade volumes with the EU is damaging and that British exporters are failing to keep up with a global boom in demand for manufactured goods, losing market share.
"While COVID has undoubtedly damaged trade, so too has the introduction of fresh trade barriers with the EU," said James Smith, research director at the Resolution Foundation think tank.
($1 = 0.7376 pounds)