Gross domestic product (GDP) declined by 2.9% month on month in January, reversing a rise of 1.2% between November and December, the Office for National Statistics (ONS) said.
GDP remained 9% below its pre-pandemic levels in January.
The fall came at a time when the economy had been placed under some of the toughest restrictions since coronavirus first hit a year ago.
However, businesses have adapted better to changing circumstances, the data suggests, with the 2.9% decline lower than the 4.9% economists had predicted.
The services sector took the brunt of the fall, shrinking by 3.5% in January as rafts of hospitality and leisure firms were forced to shut due to new lockdown restrictions.
The sector is now 10.2% smaller than it was in February 2020, before the impact of the pandemic was first fully felt.
Construction grew by 0.9% during the month as its recovery continued and new work came in.
But the production sector fell by 1.5% in January 2021, after manufacturing contracted for the first time since last April – down 2.3% – according to the figures.
Deputy national statistician for economic statistics Jonathan Athow said: “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.
“Manufacturing also saw its first decline since April, with car manufacturing falling significantly.
“However, increases in health services from both vaccine rollout and increased testing partially offset the declines in other industries.
“Both imports and exports to the EU fell markedly in January, with much of this likely the result of temporary factors. Returns from our more timely surveys and other indicators suggest trading began to recover towards the end of the month.”
Office for Budget Responsibility (OBR) forecasts have GDP dropping 3.8% in the first quarter before bouncing back by 3.9% in the second quarter, if the Government’s vaccination rollout and road map reopening goes to plan.
January’s decline is expected to continue in February, with last week’s Budget by Chancellor Rishi Sunak extending support packages across several sectors, including furlough until September, a business rates holiday until April, and £5 billion in grants for struggling businesses.
Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said: “Activity fell in January, as widely expected, with much of the UK entering some form of lockdown at the start of the year.
“However, the decline was notably smaller than the first lockdown in spring 2020, demonstrating the growing ability of businesses and households to adapt to greater restrictions on mobility.”