UK economy suffers surprise slump on snowy weather

25th January 2011, Comments 0 comments

The UK economy slumped unexpectedly in the fourth quarter of 2010, official data showed Tuesday, as freezing weather helped choke off the fragile recovery and sparked new recession fears.

Gross domestic product (GDP) shrank 0.5 percent in the three months to December, after expansion of 0.7 percent in the third quarter, the Office for National Statistics (ONS) said in a statement.

That was the first drop in economic output since the third quarter of 2009 and confounded expectations for 0.4-percent expansion.

The unexpected dive, which has ended one year of growth, re-ignited market concerns that Britain could be heading for another downturn as state austerity measures also take their toll, analysts said.

"The GDP figures today were shockingly bad, but heavily affected by the temporary effects of the snow in December on construction, retailing, transport and other services," said John Hawksworth, economist at PricewaterhouseCoopers.

"We would expect some rebound in the first quarter, but it certainly adds to the risk of a double dip given the coming squeeze on the consumer from higher taxes and prices and reduce welfare benefits."

The UK government hiked value-added taxation (VAT), which is levied on goods and services, at the start of this month as part of its wide-ranging deficit reduction plans that also included painful spending cuts.

"We would expect some of the economic activity lost due to the weather in the fourth quarter to be made up in the first quarter of 2011," added economist Charles Davis at the Centre for Economics and Business Research consultancy.

"But, with the VAT rise likely to have hit consumer spending in the first quarter of 2011, we cannot rule out the possibility of a technical recession."

The technical definition of a recession is two or more successive quarters of economic contraction.

The British pound meanwhile slumped and the London stock market slid in reaction to Tuesday's data, as dealers predicted that the Bank of England would not risk raising interest rates to curb inflation.

The GDP data was published as the International Monetary Fund said that global economic recovery was gaining traction but is "still at risk" because of eurozone debt worries and a lack of financial reform.

The Washington-based institution said a two-speed recovery -- with advanced economies growing at a significantly slower pace than emerging economies -- was shifting gears as tax cuts in the United States boosted consumption.

In Britain, the ONS said that British services and construction fared particularly badly in the fourth quarter.

British finance minister George Osborne argued that the data was skewed by heavy snowfall and freezing temperatures last month.

"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," Osborne said in response.

"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."

However, the ONS also revealed that growth would have stood at zero in the fourth quarter, if the impact of the bad weather was removed, stoking renewed concerns about the broader health of the economy.

Capital Economics analyst Jonathan Loynes added that the economy's fragile state raised "serious questions over whether the economy is in a strong enough position to withstand the fiscal tightening".

© 2011 AFP

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