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UK economy suffers 0.5% contraction UK economy suffers 0.5% contraction
(about 1 hour later)
The UK's economy suffered a shock contraction in the last three months of 2010, figures have shown. The UK's economy suffered a shock contraction of 0.5% in the last three months of 2010, figures have shown.
The economy shrank by 0.5% in the October-to-December period, the Office for National Statistics (ONS) said. The severe weather hit activity in the quarter, but the Office for National Statistics (ONS) said even if the weather impact had been excluded, activity would have been "flattish".
The severe weather hit activity in the quarter, but the ONS said even if the weather impact had been excluded, activity would have been "flattish". The Chancellor, George Osborne, said the numbers were disappointing.
The contraction follows growth of 0.7% in the previous three months and 1.1% in the second quarter of 2010. But he added the government would not be "blown off course" from its austerity programme.
The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.
But Chancellor George Osborne said the government would not change its austerity programme. The BBC's economics editor Stephanie Flanders said people were right to worry about where the UK's growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.
"These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December," he said in a statement. The contraction follows four straight quarters of growth.
"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather."
The release is a first estimate for the quarter from the ONS and is subject to revision. The statistics body will publish two further updates at monthly intervals.The release is a first estimate for the quarter from the ONS and is subject to revision. The statistics body will publish two further updates at monthly intervals.
'Horrendous''Horrendous'
The contraction took economists by surprise, as forecasts had been for growth of between 0.2% and 0.6%.The contraction took economists by surprise, as forecasts had been for growth of between 0.2% and 0.6%.
The construction industry was a large contributor to the fall, with activity decreasing by 3.3% in the quarter.The construction industry was a large contributor to the fall, with activity decreasing by 3.3% in the quarter.
"This is a horrendous figure. An absolute disaster for the economy. We knew that retail sales were heavily affected and that services output would be weak, but the collapse in construction was a major contributor to the downside surprise," said Hetal Mehta from Daiwa Capital."This is a horrendous figure. An absolute disaster for the economy. We knew that retail sales were heavily affected and that services output would be weak, but the collapse in construction was a major contributor to the downside surprise," said Hetal Mehta from Daiwa Capital.
"While today's GDP figures are backward looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. 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.""While today's GDP figures are backward looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. 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."
The sector that saw the most growth was manufacturing, which expanded by 1.4%.The sector that saw the most growth was manufacturing, which expanded by 1.4%.
"Manufacturing remains the one bright spot on the landscape clouded with uncertainty but there are widespread challenges at home and abroad that could still dent growth this year," said Jeegar Kakkad from the manufacturers' organisation, the EEF."Manufacturing remains the one bright spot on the landscape clouded with uncertainty but there are widespread challenges at home and abroad that could still dent growth this year," said Jeegar Kakkad from the manufacturers' organisation, the EEF.
'No question'
The chancellor blamed the severe weather for the weak figures, but said he had no intention of changing his programme of cuts to public spending.
"These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December," Mr Osborne said.
"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather."
Sterling fell sharply following the announcement from the ONS, dropping more than a cent against the dollar to $1.5770.
The weak figures also highlight the dilemma facing the Bank of England, which needs to tackle above-target inflation but is reluctant to raise interest rates when the UK's economic recovery is still uncertain.
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