Gross domestic product (GDP) unexpectedly fell by 0.5 per cent in the fourth quarter, according to figures from the Office for National Statistics (ONS) released today.
After a 0.7 per cent growth in Q3 2010, small growth was expected for Q4 but a massive 3.3 per cent drop in construction output contributed to the decline.
The ONS reported earlier this month that retail sales fell 0.3 per cent in December, thanks largely to heavy snowfall over the key festive period.
Chancellor of the Exchequer, George Osborne, laid the blamed for the surprisingly poor performance of the UK economy on the severe weather, and refused to reconsider the austerity measures being implemented by the government.
“There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month,” Osborne said.
“That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather.”
Capital Economics, the independent macroeconomic research consultancy, estimates that the bad weather knocked about 0.5 per cent off GDP in Q4 meaning that without it the economy would have been stagnant.
Vicky Redwood, Senior UK Economist at Capital Economics, believes that these figures raise concerns over the government’s planned cuts and that the VAT rise in January and commodity prices still increasing things could get worse this year.
“The apparent underlying slowdown in the recovery at the end of last year echoes the gloomier tone of some of the business surveys,” Redwood commented.
“With households facing a toxic combination of weak wages growth, high inflation, rising taxes and falling house prices - and exports unlikely to compensate fully - we expect GDP to expand by a sluggish 1.5 per cent or less this year.”
Due to a element of uncertainty in the ONS figures, Redwood believes that the true health of the economy is hard to judge and lost output could boost growth in Q1 this year, but alternative plans might be needed by the government if the GDP falters further.
Redwood added: “The government has some flexibility to scale back the cuts - current forecasts show it meeting its fiscal mandate a year early.
“But the apparent lack of a proper “Plan B” should the economy be materially weaker is a clear worry and underlines the need for the Monetary Policy Committee to ignore the recent clamour for higher interest rates and continue to provide the economy with as much support as it can.”