UK Economy suffers surprise 0.5% contraction

The UK's economy suffered a shock contraction of 0.5% in the last three months of 2010, figures have shown. The severe weather hit activity in the quarter, but the Office for National Statistics (ONS) said even if the weather impact had been excluded, activity would have been "flattish". The Chancellor, George Osborne, said the numbers were disappointing. But he added the government would not be "blown off course" from its austerity programme.

The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year. The BBC's economics editor Stephanie Flanders said people were right to worry about where the UK's growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.

The contraction follows four straight quarters of growth. The release is a first estimate for the quarter from the ONS and is subject to revision. The statistics body will publish two further updates at monthly intervals. The contraction took economists by surprise, as forecasts had been for growth of between 0.2% and 0.6%. The construction industry was a large contributor to the fall, with activity decreasing by 3.3% in the quarter.

"This is a horrendous figure. An absolute disaster for the economy. We knew that retail sales were heavily affected and that services output would be weak, but the collapse in construction was a major contributor to the downside surprise," said Hetal Mehta from Daiwa Capital.

"While today's GDP figures are backward looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. It seems that the economy is incredibly vulnerable. And with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride."

Source : BBC.co.uk