UK economy shrinks in Q4

Shock contraction in last three months of 2010 leaves analysts on the back foot as bad weather is blamed

The UK’s economy shrank by 0.5 per cent in the final quarter of 2010, according to the latest figures from the Office of National Statistics (ONS).

Bad weather in the Christmas run-up was deciphered as being the primary culprit, but the ONS said that even if the weather had not been a factor, economic activity would have been "flattish".

Economists had been predicting growth of between 0.2 per cent and 0.6 per cent and were caught on the back foot by the figures.

The biggest contributor to the drop was the construction industry which saw activity decrease by 3.3 per cent in the quarter.

Manufacturing saw the biggest growth for the quarter of 1.4 per cent.

Chancellor George Osborne, aside from blaming the weather, said he had no intention of changing his public spending cuts.

“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.

"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."

Commenting on the figures, John Walker, national chairman of the Federation of Small Businesses, said the findings corresponded with an FSB report on falling business confidence.

“Small business confidence fell to its lowest level in the final quarter of 2010. It is clear that the government can’t just cut its way back to growth and that 2011 is only going to get tougher as the impact of the VAT rise and the increase in fuel duty kicks in,” he said.

Walker warned that the dreaded "double dip" was a distinct possibility.

“The coalition government has been dominated by a relentless focus on cuts. And while other countries have cut VAT, particularly in sensitive areas such as construction, the UK government has increased it,” he said.

“As a double-dip recession comes ever closer, we need to see the government look to ways to nurture entrepreneurship and allow small firms to grow, such as extending the National Insurance holiday to existing businesses that take on new staff and keeping to its manifesto promise and introducing a fuel duty stabiliser.”