UK economy shrinks 0.5% in Q4

25 January 2011 | By Natalie Thomas

The drop follows growth of 0.7% in Q3 and 1.1% in Q2 of 2010.

Jonathan Loynes, chief european economist at Capital Economics, says: “Although heavily affected by the weather, the UK’s shockingly bad Q4 GDP figures revealing a 0.5% quarterly drop will nonetheless raise serious concerns over whether the economy is in a strong enough position to withstand the coming fiscal tightening.”

Christina Weisz, director of Currency Solutions, says alongside weak growth, we now have the very real prospect that more money will be printed, which will further dilute Sterling and stagflation is now a real and imminent threat.

She says 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.

She adds: “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.”

But Richard Sexton, director of e.surv chartered surveyors, says: “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.”

He says 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. 

He adds: “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.”

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