Double dip fears as economy shrinks
The coalition Government has been forced to defend its tough austerity measures after official figures revealed the UK economy unexpectedly shrank in the fourth quarter.
The severe weather last month triggered a drop in demand for the key services sector, which makes up more than 75% of the economy, sparking a shock 0.5% plunge in gross domestic product (GDP) between October and December, said the Office for National Statistics (ONS).
Analysts warned the surprise decline - the first since the third quarter of 2009 - seriously damaged prospects for the economy as it takes the strain of the Government's sharp austerity measures.
Bank of England governor Mervyn King told a dinner for accountants that the figures emphasised the "choppy" course of the economic recovery, but said stubbornly high inflation was of more immediate concern.
Chancellor George Osborne and his coalition allies remained defiant and said the Government would not allow plans for fiscal tightening to be "blown off course by bad weather".
The City was alarmed by the figures as shares fell and the pound shed two cents against the US dollar.
Economists were expecting growth of between 0.2% and 0.6% in the fourth quarter, but cautioned the adverse weather made it difficult to provide accurate forecasts. Even without the Arctic conditions, the ONS said growth in the fourth quarter would have been flat quarter-on-quarter.
The contraction in GDP shows the economy has weakened just as the Chancellor rolls out his £81 billion package of spending cuts, which include hundreds of thousands of public sector job losses. Economists warned the fall in GDP output has shaken confidence in the ability of the private sector to pick up the expected slack in the economy and hold off a double-dip recession - defined as two consecutive quarters of economic contraction.
Jonathan Loynes, chief European economist at Capital Economics, described the figures as "shockingly bad". He said: "Although heavily affected by the weather, the UK's shockingly bad fourth quarter GDP figures - showing a 0.5% quarterly contraction - raise serious concerns over whether the economy is in a strong enough position to withstand the fiscal tightening."
Mr Loynes expects the economy to rebound in the current quarter, as it did after poor weather in the fourth quarter of 2009. But he said other adverse forces, not least the impact of the latest VAT hike, could limit the size of the bounce.