Economic recovery falters again

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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