Economic recovery falters again
The UK's economy is a worse condition than expected, as new ONS figures reveal that GDP shrank by 0.6% in the last three months of 2010. The initial estimate was for a 0.5% reduction caused in main by December's arctic conditions.
Many analysts had hoped figures would be revised upwards and this shock result has dealt the recovery a further blow. It will also reduce pressure on the Bank of England to increase interest rates.
In the minutes of the last Monetary Policy Committee meeting, published earlier this week, it was revealed that three members had voted in favour of a rate rise in order to slow rising inflation, up from two the previous month.
Martin Weale and Spencer Dale voted to raise interest rates to 0.75%, while Andrew Sentence, the most hawkish member of the committee voted to increase rates to 1%. Both the ONS and the Bank of England insist that if it weren't for such extreme weather in December, the fourth quarter GDP would not have been in negative territory.
Howard Archer, chief European and UK economist at IHS Global Insight is not convinced by the strength of this argument. He said: "It's true that activity was hit appreciably by December's severe weather and the signs are that activity did bounce back in January.
"Even so, major question marks remain over how the economy will fare over the coming months as the fiscal squeeze increasingly bites. In particular, there are growing signs consumers may be reigning in their spending in the face of serious pressures."
Archer predicts GDP will rebound by 0.8% quarter-on-quarter in the first quarter of this year, to take growth to 0.2%. But he said this will be driven by increased activity in the first quarter to make up for the slowdown in December. As the year progresses he expects growth to moderate appreciably, with overall GDP growth for the year at 1.6%.
This article was written for Interactive Investor
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).