GDP decline was 'worse than originally feared'

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The Independent Online

The strength of the recovery in the UK was dealt a further blow today as official figures revealed the decline in the economy in the final three months of 2010 was worse than originally feared.

Gross domestic product declined by 0.6% between October and December, the Office for National Statistics (ONS) said, revised downward from an original estimate of a decline of 0.5%. It is the largest GDP fall in more than two years, since the second quarter in 2009.

The severe weather in December was still largely to blame for the plunge in the fourth quarter, the ONS said, which ended a year of growth in the UK.

But today's revised data, which includes details of the expenditure side of the economy for the first time, showed household spending declined 0.1%, the first drop since the second quarter of 2009.

The figures were worse than economists expected and will raise further concerns over the strength of the economy and its ability to withstand the coalition Government's deficit-busting austerity measures.

The worse-than-feared contraction in GDP will seriously damage prospects for the economy over the next year, as Chancellor George Osborne rolls out his £81 billion package of spending cuts - which include hundreds of thousands of public sector job losses.

The fall in GDP output is likely to shake confidence in the ability of the private sector to pick up the expected slack in the economy and hold off a double-dip recession.

But the Treasury remained defiant following today's figures.

A spokesman for the department said: "The Chancellor said that the fourth quarter growth figures were disappointing and today's revision doesn't change that fact.

"It also doesn't change the need to deal with the nation's credit card - the country is borrowing more this year than is spent on the entire NHS."

A spokesman for the ONS said without the weather, the revised GDP output in the fourth quarter was still likely to have shown a decline of 0.1%.

A significant drop in business investment, which was down 2.5% to £29.6 billion in the fourth quarter, hurt the expenditure figures, the ONS said.

But the key services sector - which makes up more than 75% of the total economy - declined by 0.6% in the fourth quarter, compared to an original estimate of a decline of 0.5%.

The manufacturing sector did not fare as well as originally thought either, as output increased by 1.1%, revised down from growth of 1.4%.

The construction blip, which boosted growth in the second and third quarter of 2010, ended in the fourth quarter - with construction output dropping 2.5%. However, this was revised up from an original estimate of a decline of 3.3%.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "This is a hugely disappointing set of data - both in the fact that GDP contracted more than first reported in the fourth quarter of 2010 and in the breakdown of the components on the expenditure side."

He added: "Major question remarks remain over how the economy will fare over the coming months as the fiscal squeeze increasingly bites. In particular, there are currently growing signs that consumers may be reining in their spending in the face of serious pressures."

Meanwhile, the severe reversal will complicate matters further for the Bank of England, where policymakers are tussling with stubbornly high inflation and a fragile economy. Documents recently revealed the Monetary Policy Committee (MPC) was prepared to "wait and see" how the economy fared in the first quarter of 2011 before considering an interest rate hike.

Vicky Redwood, senior UK economist at Capital Economics, said: "The slight downward revision to UK GDP in Q4 might give the more hawkishly inclined members of the MPC reason to pause for thought. "The recent MPC minutes had flagged the possibility that the data would be revised up, but in fact the drop in GDP was revised from 0.5% to a bigger 0.6%."

The opposition were quick to seize on today's figures as further evidence against the Chancellor's austerity measures.

Shadow chancellor Ed Balls said the spending cuts were "too deep and too fast".

The Labour MP said: "These are disappointing figures which confirm that the recovery stalled and the economy contracted at the end of last year, even once the effects of the snow have been taken into account."

He added: "We now face the worst of all worlds - unemployment and inflation both rising, growth stalled and consumer confidence collapsed. And this is before the Government's extreme fiscal tightening really starts to bite."