Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest weather in a century last month hampered services and retailing.
Gross domestic product fell 0.5 per cent in the three months through December after increasing 0.7 per cent in the previous quarter, the Office for National Statistics said in London today. Economists forecast a 0.5 per cent gain, based on the median of 33 predictions in a Bloomberg news survey. Growth would have been “flattish” in the quarter without the impact of the weather, the statistics office said.
The pound dropped after the report, which shows the UK recovery is losing momentum even before Prime Minister David Cameron’s government steps up its fiscal squeeze to cut the budget deficit. While the Bank of England left its key interest rate on hold this month, inflation has soared to an eight-month high and policy maker Andrew Sentance said late yesterday the “time has come to act” as price pressures intensify.
“The economy is underheating, not overheating,” Neil Mackinnon, an economist at VTB Capital Inc in London and a former Treasury official, said in a phone interview. “An interest-rate increase would easily push the economy back into recession and would be a major policy error.”
The pound fell as much as 0.6 per cent against the dollar after the data and was at $1.5808 as of 9.43 am in London. UK 10-year gilts rose, with the yield falling to 3.63 per cent.
‘Liable to revision’
The 0.5 per cent drop in GDP is the biggest since the second quarter of 2009, when it fell 0.8 per cent. The statistics office said the data is “more liable to revision than usual.” From a year earlier, the economy expanded 1.7 per cent in the fourth quarter.
“These are obviously disappointing numbers,” UK Chancellor of the Exchequer George Osborne said in a statement released by the Treasury. Still, “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.”