Double dip fears as economy shrinks

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Chancellor George Osborne said a plans for fiscal tightening would not be 'blown off course by bad weather'

Fears of a double-dip recession in the UK heightened after official figures revealed the economy unexpectedly shrank in the fourth quarter.

The severe weather last month was blamed for the shock 0.5% plunge in gross domestic product (GDP) between October and December, the Office for National Statistics (ONS) said, and was driven by a decline in the key services sector – which makes up more than 75% of the total economy.

Analysts warned the surprise decline – the first since the third quarter of 2009 – seriously damaged prospects for the economy as it takes the strain of the Government’s sharp austerity measures.

Chancellor George Osborne, however, remained defiant and said the coalition would not allow his plans for fiscal tightening to be “blown off course by bad weather”. The City was alarmed by the figures as the FTSE 100 Index and pound both dropped, while pressure mounted on Bank of England governor Mervyn King, who is tasked with taming high inflation and supporting growth.

Economists were expecting growth of between 0.2% and 0.6% in the fourth quarter but warned that the adverse weather made it difficult to provide accurate forecasts. Even without the Arctic conditions, the ONS said growth in the fourth quarter would have been flat quarter-on-quarter.

The contraction in GDP shows the economy has weakened just as the Chancellor rolls out his £81 billion package of spending cuts, which include hundreds of thousands of public sector job losses.

Economists warned the fall in GDP output has shaken confidence in the ability of the private sector to pick up the expected slack in the economy and hold off a double-dip recession – defined as two consecutive quarters of economic contraction.

Jonathan Loynes, chief European economist at Capital Economics, described the figures as “shockingly bad”. He said: “Although heavily affected by the weather, the UK’s shockingly-bad fourth quarter GDP figures – showing a 0.5% quarterly contraction – raise serious concerns over whether the economy is in a strong-enough position to withstand the fiscal tightening.”

Mr Loynes expects the economy to rebound in the current quarter, as it did after poor weather in the fourth quarter of 2009, but other adverse forces, not least the impact of the latest VAT hike, could limit the size of the bounce.

But Britain’s creaking public finances received some relief as official figures revealed public borrowing increased by a lower-than-expected £16.8 billion in December. The figure, which excludes financial interventions by the Government, was a marked decrease on the £21 billion borrowed a year earlier, the ONS said.

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