Shock as UK economy shrinks by 0.5%
ONS blames wintry weather for most of the contraction
Economists now fear 'stagflation'
Pound and FTSE 100 fall
What the economists say
The UK economy shrunk by a shock 0.5% in the last quarter of 2010 as Britain's recovery from recession faltered.
Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat suggesting that the UK economy had already run out of steam before the snow hit the country.
Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of "stagflation".
The eagerly awaited GDP figures put the government's austerity programme under fresh scrutiny, with the Labour Party again arguing that cuts are being made too deeply, and too rapidly.
"Even accounting for the snow today's ONS figures show the Conservative-led government has no policies for growth," said Labour MP Chuka Umunna, claiming David Cameron's administration was "a government of bystanders".
The chancellor George Osborne, though, refused to change tack despite the evidence that Britain's economy shrank again.
"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month," he said.
"That would plunge Britain into a financial crisis. We will not be blown off course by bad weat! her," Os borne added.
The data sent the pound falling by more than one cent against the dollar to $1.576, and pushed the FTSE 100 index down by 36 points.
Deputy prime minister Nick Clegg said Britain's economic recovery was still in its "early days".
"The government has been doing the difficult work of putting the building blocks in place," Clegg said.
Yesterday, though, the outgoing head of the CBI claimed that the government had failed to create a credible growth strategy.
Construction slumps
The ONS reported that the services sector - the dominant part of the UK economy - shrank by 0.5% in the last quarter. Construction suffered a 3.3% decline, but industry grew by 0.9%.
Data released earlier this month had shown that servicessuffered a sharp drop in activity in December, when snow and ice prevented many people from reaching their offices or the high street. Output in the construction industry also slowed last month, which analysts blamed on public sector cutbacks and the weather.
Alasdair Reisner of the Civil Engineering Contractors Association urged the government to do more to support the construction industry, or risk a further contraction in the economy.
"It is clear that a downturn in activity in the industry has an impact that is felt far beyond the site fence, acting as a brake on the country's ambitions to return to growth," said Reisner.
High street f! irms als o suffered from the snow, with the retail sector suffering its worst December in 12 years.
City experts had expected GDP to grow by anything from 0.1% and 0.7% with last month's weather making predictions harder.
George Buckley of Deutsche Bank said today's 0.5% decline was "quite shocking", and questioned whether the snow could really be blamed for the drop in economic activity.
Hetal Mehta said it was "an absolute disaster for the economy".
"It seems that the economy is incredibly vulnerable, and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride," Mehta said.
Charles Davis, managing economist at CEBR, was concerned that the UK economy experienced a "complete loss of momentum" at the end of last year.
"Few of us could have expected such a sharp contraction in output and the United Kingdom economy now faces the prospect of returning to recession," David warned.
On a year-on-year basis, GDP during the quarter was 1.7% higher than in the last three months of 2009 - sharply slower than the 2.6% growth expected in the City.
Some economists predicted that the data could well be revised upwards in the coming weeks. Usually the ONS has little data from the final month of any quarter when it publishes its first estimate of GDP. This time, though, it put extra effort into trying to quantify the impact of the snow.
An early interest rise also looks less likely, according to Howard Archer of IHS Global Insight.
"Given that the contraction in GDP in the fourth quarter occurred even before the fiscal tightening had really kicked in, it reinforces already serious concern over the economy's ability to grow significantly in the face of the spending cuts and tax hikes that will increasingly bite as 2011 progresses," he said.
Comments