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UK economy shrinks shock 0.5%

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31/01/2011

The UK economy shrank a shock 0.5% in the last quarter of 2010, as adverse weather swept the country, figures from the Office of National Statistics have revealed.

The figures have taken economists by surprise, who had predicted growth of between 0.2% and 0.6%. The ONS said the snowy conditions in December had contributed to most of the contraction between October and December last year, following growth of 0.7% in the previous quarter.

It said that if no disruption had occurred, GDP would be “flattish” rather than falling.

This was the first contraction in growth since Q3 2009 and comes as a blow to the country’s prospects for economic recovery.

Nevertheless, GDP was up 1.7% in Q4 2010 compared to the last quarter of 2009. Richard Sexton, director of e.surv chartered surveyors, highlighted that the ONS figures were only an initial estimate.

He added: “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.”

Chancellor George Osborne said the GDP figures were “obviously disappointing”: “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 forecast.

It’s notable that sectors of the economy that are less affected by the poor weather, such as manufacturing, continue to perform strongly, helping to rebalance our economy.”

However, he added: “It would be disastrous to change 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.”

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