UK economy shrank 0.5% in fourth quarter‎

The British economy suffered its sharpest contraction since mid-2009 late last year, despite shrinking slightly less than previously estimated, according to figures that highlight the uncertain nature of its recovery.

Economists said today's final estimate for fourth-quarter GDP data confirmed a weak start point for Britain as the government sets major spending cuts in train and Bank of England policymakers argue over whether to raise interest rates to tackle above-target inflation.

However, it is first-quarter economic data next month that will be key in clearing up whether the fall in gross domestic product was a one-off exacerbated by the coldest December in 100 years, or the start of a longer period of sub-par growth.

The Office for National Statistics (ONS) said GDP fell by 0.5 per cent in the last three months of 2010 - the same as its initial estimate in January but a slightly smaller fall than a revised estimate of 0.6 per cent made last month.

Heavy snow knocked 0.5 per cent off output, the ONS said, and some economists say the looming public spending cuts are already prompting retrenchment by households and businesses reliant on government jobs and contracts.

The fourth-quarter economic contraction makes Britain an outlier among other major developed economies, including those such as the United States, Germany and France which also suffered harsh winter weather but managed to grow.

Year-on-year, fourth-quarter GDP growth was unrevised at 1.5 per cent, in line with economists' forecasts.

Share prices pared losses after the data, but there was little reaction from sterling or the government bond market.

The weak data has cast doubt on whether Britain's economic recovery is back on track after the deepest recession since at least World War Two, as under normal circumstances GDP should grow by just over 0.5 per cent a quarter.

With inflation more than double its target at 4.4 per cent, three Bank policymakers argued last month that rate rises were overdue, and that delaying risked creating a wage-price spiral.

But the six other members of the Bank's Monetary Policy Committee were worried about dismal consumer morale and spending, and that wage growth was likely to remain tepid.

Today's GDP data showed that household spending fell by 0.3 per cent in real terms in the last three months of 2010, its biggest drop since the depths of the recession in 2009.

For 2010 as a whole, household disposable income suffered its biggest real-terms fall since 1977.

Separate Bank of England data also released today showed a bigger-than-expected rise in mortgage approvals and the amount of consumer lending, though both remained well below pre-recession averages.

The ONS data showed that both the services sector and the construction sector suffered their biggest contractions since the second quarter of 2009, though the declines were less steep than the ONS had earlier estimated.

Industrial output grew at its fastest pace since the second quarter of 2010, but this did not stop Britain recording its biggest goods trade deficit since records began in 1955.

Economists at Citi said that some of the sharp rise in imports could have been due to businesses increasing inventories before a rise in sales tax took effect at the start of 2011.

Both the Bank and the government have forecast that British exports should recover strongly in time, given that sterling suffered its steepest fall in trade-weighted terms since the 1930s during 2007 and 2008.

However, the opposition Labour Party said today's data reinforced its view that the government should scale back plans to cut spending - which currently aim to largely eliminate a budget deficit of over 10 per cent of GDP over the next 4 years.

Reuters