Perspective News

The UK economy contracted unexpectedly during the fourth quarter of 2010 after activity was hampered by unusually wintry weather. According to final revised figures from the Office for National Statistics (ONS), the economy shrank by 0.5% over the quarter.

This contraction came after the economy had unexpectedly grown by 0.7% during the third quarter and by 1.1% during the second, leading to the UK posting its first full year of economic growth since 2007, a total of 1.5% over 2010.

The final quarter’s contraction was led by a sharp fall in activity in the construction sector, which declined by 2.3% during the period. The bad weather led to UK retail sales falling 0.8% during December alone as many shoppers found their travel plans thwarted. In the run-up to the festive season, sales at food stores experienced their most dramatic year-on-year fall since records began. The services sector – the largest contributor to UK economic growth – contracted by 0.6%. In contrast, the manufacturing sector expanded by 1.1%.

However, although the bad weather was certainly a major issue, the ONS did emphasise that even without that disruption, economic growth would still have been no more than “flattish” over the period.

One thing the shock contraction did was raise fresh speculation about the possibility of a “double-dip” recession. The concern is that, with the coalition government’s tough austerity measures yet to be fully reflected, the UK’s nascent economic recovery might already have run out of steam. The rise in VAT to 20% is likely to have hit demand since its introduction in January as consumers tighten their belts. The public sector spending cuts have yet to kick in and rising food and fuel prices are affecting evey consumer – not only those in the UK.

UK interest rates have now been at just 0.5% for two years but, driven by these rising prices, inflationary pressures are mounting and intensifying calls for the Bank of England (BoE) to raise those rates from this record low level. That too will have a dampening effect, if and when the decision is finally made. However, nothing can be considered certain at this point. Analysts and economists will instead be pouring over all the data releases they can find in this coming period, in an attempt to identify a trend.

The contents of this article should not be construed as advice and do not necessarily reflect our views. Independent Financial Advice should always be attained in order to assess your own individual circumstances.