Fwd: Macroperu GDP falls for first time since recession The UK economy contracted in the final

 

GDP falls for first time since recession

The UK economy contracted in the final three months of 2010, official figures revealed, stunning markets and reigniting fears that the recovery may yet degenerate into a double-dip recession.

Short sterling futures - trades which indicate when markets think interest rates will rise - showed investors are no longer betting on a hike before June Photo: Reuters

By Emma Rowley 8:44PM GMT 25 Jan 2011

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Gross domestic product (GDP) fell 0.5pc on the previous quarter, according to the Office for National Statistics (ONS), as December's severe weather helped push growth into negative territory.

However, the ONS said that even without the snow disruption, there would have been zero growth.

The data fell short of the most cautious predictions, let alone the consensus forecast for 0.5pc growth.

"This is a horrendous figure. An absolute disaster," said Hetal Mehta, an economist at Daiwa. "It seems that the economy is incredibly vulnerable. And with the fiscal tightening yet to fully bite, we have to brace ourselves for a bumpy ride."

Mervyn King, Governor of the Bank of England, said the GDP figures were evidence of the "choppy" recovery he had predicted but voiced his greater focus on inflation.

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The pound hit its lowest level in a month against the dollar, trading 1.5pc down at one point, as markets judged the chances of the Bank raising rates soon were receding, despite it facing criticism about over-target inflation.

Short sterling futures - trades which indicate when markets think rates will rise - showed investors are no longer betting on a hike before June, given the threat that making borrowing more costly might pose to growth.

Brent oil also tumbled almost $2 to $94.75 on the news, although it had recovered 75 cents as the UK markets closed.

Analysts were divided as to what the data signalled for the UK in coming months, as the ONS noted the snow's impact was "inevitably uncertain" at this stage.

Enam Ahmed, an economist at Moody's Analytics, said the chances of a double-dip were now "very high". However, others were less negative, questioning whether underlying growth was really "flattish" as the ONS judged.

George Buckley, an economist at Deutsche Bank, said there might even be a sizeable rebound in the current quarter as the economy sees some catch-up of lost business.

Chancellor George Osborne said the contraction would not derail his austerity plans, despite expectations that public spending cuts will slow growth further.

Overall the economy grew just 1.4pc in 2010 on the previous year, far short of the 1.8pc predicted by the Office for Budget Responsibility, the independent fiscal watchdog.

Construction was the worst performer, with output shrinking 3.3pc on the previous quarter. The slide was not a huge shock, given the sector's vulnerability to bad weather.

Perhaps more worryingly, the mammoth services sector, which accounts for three quarters of national output, also slid into negative territory, shrinking 0.5pc. The contraction accounted for most of the overall fall in the headline GDP figure.

The sector's weather-sensitive areas such as restaurants and transport took a hit, as expected, but areas such as computer services also suffered, suggesting weakening demand caused problems, as well as the weather.

Manufacturing remained the recovery's success story, expanding 1.4pc. However, the sector accounts for less than 13pc of output.

Separately, figures for December showed the public sector borrowed £16.8bn last month, a drop on the £21bn figure of 12 months earlier and less than expected after November's record £21.1bn. However, the ONS noted that borrowing in December 2009 saw the UK inject capital into the banks, distorting the comparison.

Total receipts from taxes and income were up 3.9pc, but the improvement was outpaced by total expenditure rising 5.2pc – a slowdown from November, but still indicating that spending kept growing, despite Government efforts.

The figures also took state-backed banks RBS and Lloyds on to the nation's balance sheet for the first time, which added £1.3 trillion to the UK's net debt, taking it to £2.3 trillion or 155pc of GDP.

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