Shock 0.5 per cent fall for UK economy

Sarah Davidson

January 25, 2011

A statement from the Office for National Statistics said: “The change in GDP in Q4 was clearly affected by the extremely bad weather in December last year. If there had been no disruption, GDP would be showing a flattish picture.

“We should emphasise that this assessment of the effect of the bad weather is the best we can make it at this stage, but is still inevitably uncertain.

“The preliminary estimate is subject to revision in our next GDP release on 25 February and as the bad weather creates more uncertainty than usual it increases the chance that the GDP estimate will be revised.”

Output in the production industries increased 0.9%. Output in the construction sector decreased 3.3%. Output in the service industries decreased 0.5%. GDP increased 1.7% in 2010 Q4 compared with 2009 Q4.

Richard Sexton, director of e.surv chartered surveyors, said: “In the words of Corporal Jones, don’t panic. First, this is only an initial estimate, based on returns that are about 50% incomplete. Second, December’s cold snap will have had a significant and material effect on the figures.

“That makes it tricky to plot any meaningful trend from this data. Third, it’s unfair to judge these stats against the Q3 2010 – that was an outstanding quarter.

“It’s tomorrow’s economic news that’s the most important of the week. The publication of the minutes of the Bank of England’s most recent Monetary Policy Committee will tell us whether Andrew Sentance has persuaded any of his eight fellow members to vote for an increase in interest rates.

“I certainly hope not; it could be a disaster for the property and mortgage industries – although we would see an initial rise in remortgage activity as a result. Ultimately, both sectors need further stimulus rather than additional disincentives.”

The Council of Mortgage Lenders said: “If anything, today’s GDP announcement dampens the prospect of an imminent rate rise, and in isolation does not affect our 2011 forecasts.”

Christina Weisz, director of foreign exchange specialists Currency Solutions, said: “Stagflation is now a real and imminent threat. Although the extreme weather conditions would certainly have contributed to the shock performance of the economy in Q4, the real reasons for its continued stagnation are far more fundamental.

“Consumer spending and demand have been decimated by rising unemployment, rising living costs and the prospect that rates could rise sooner rather than later as inflation runs out of control.

“Businesses likewise remain deeply cautious, which is massively inhibiting growth. And where businesses do want to invest and grow, they are often prevented from doing so by the banks, which just won’t provide the necessary funds. This is a recession of confidence as much as output.”

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