Economy shrinks in fourth quarter

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Chancellor George Osborne said a decline in GDP for the fourth quarter of 2010 was 'disappointing'

The economic recovery in the UK has suffered a shock blow as figures revealed that gross domestic product (GDP) declined by 0.5% in the fourth quarter, raising fears of a double-dip recession.

The severe weather last month was almost entirely to blame for the unexpected plunge between October and December, which ended a year of economic growth in the UK, the Office for National Statistics (ONS) said.

The decline in GDP – the first since the third quarter of 2009 – was driven by a 0.5% drop in the key services sector, which makes up more than 75% of the total economy. With this drop, total growth in 2010 stands at 1.4%, far below analysts’ forecasts.

The figure, which is a preliminary estimate and subject to revision, will raise serious concerns over the strength of the economy and its ability to withstand the coalition Government’s deficit-busting austerity measures. 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.

The dramatic contraction in GDP will seriously damage prospects for the economy over the next year, as Chancellor George Osborne rolls out his £81 billion package of spending cuts – which include hundreds of thousands of public sector job losses.

The Chancellor received some relief from data released by the ONS revealing a lower-than-expected increase in Government borrowing in December – of £16.8 billion – which will ease pressure on the creaking public finances. But a fall in GDP output is likely to shake confidence in the ability of the private sector to pick up the expected slack in the economy and hold off a double-dip recession.

But in the face of the figures, the Chancellor remained defiant. He said: “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. We have had the coldest weather since records began in 1910 and this has clearly had a much bigger impact on the economy than anyone expected. It’s notable that sectors of the economy that are less affected by the poor weather, such as manufacturing, continue to perform strongly, helping to rebalance our economy.”

A spokesman for the ONS said that, without the weather, GDP output in the fourth quarter was still likely to have been flat at 0%. Alarm bells over the impact of Arctic conditions last month have been ringing throughout January, as retailers, housebuilders and transport firms revealed a slump in activity as the big freeze took hold.

The weaker-than-expected growth figures reduce the chance of an interest rate hike, which was looking more likely as stubbornly-high inflation continues to soar. Last week, the ONS revealed the Consumer Prices Index (CPI) rate of inflation rose to 3.7% in December, pushed higher by rising food and petrol bills.

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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