UK GDP fall revives double-dip recession fears
Published 25/01/2011 | 11:12
The economic recovery in the UK suffered a shock blow today as figures revealed that gross domestic product (GDP) declined by 0.5pc 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 0.5pc drop in the key services sector, which makes up more than 75pc of the total economy. With this drop, total growth in 2010 stands at 1.4pc, 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 as it enters the age of austerity and its ability to withstand the coalition Government's deficit-busting austerity measures.
Economists were expecting growth of between 0.2pc and 0.6pc 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 UK Chancellor George Osborne rolls out his £81bn 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 today revealing a lower-than-expected increase in Government borrowing in December - of £16.8bn - 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 today's 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.
"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."
A spokesman for the ONS said that, without the weather, GDP output in the fourth quarter was still likely to have been flat at 0pc.
He said: "It's likely the bad weather contributed to most or all of that fall but we would be saying GDP was flat without the weather."
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.
Last week, the ONS revealed that retail sales in the UK suffered the worst December on record as the high street battled with freezing temperatures and heavy snowfall.
The construction blip - which boosted growth in the second and third quarter of 2010 - ended in the fourth quarter - with construction output plummeting 3.3pc. There was some reprieve for manufacturing, as production output rose 0.9pc in the quarter.
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 3.7pc in December, pushed higher by rising food and petrol bills.
Bank of England Governor Mervyn King is expected to discuss his concerns over inflation in a speech in Newcastle this evening.