The Pound suffered heavy losses today as the Office of National Statistics (ONS) reported that the UK gross domestic product (GDP) for the fourth quarter of 2010 had shrunk by 0.5%. The construction and service industries declined and the seasonal weather hampered consumer spending.
The negative figure of -0.5% is a lot lower than the positive forecast of 0.5% suggested by economists. The economy expanded by 1.2% in the 2nd quarter of 2010 and by 0.8% in the 3rd quarter, so this drop is particularly surprising. It was thought that the weak pound and expanding manufacturing sectors would offset the shrinking service sector and government spending cuts, but this has clearly not happened. If next quarter’s GDP is also negative than the UK will technically be back in recession and the feared double dip will have arrived.
The ONS mentioned that the snow had an impact on these figures. “The change in GDP in the fourth quarter was clearly affected by the extremely bad weather in December last year”. Had it not been for the snow, the ONS estimates that output for the quarter would have been “showing a flattish picture”.
The extent of this drop was quite apparent. Sterling dropped today by 1.1% against the Euro, 1.3% against the US Dollar, 1.5% against the Japanese Yen and 2% against the Swiss Franc. Gilt prices rose and yield declined as investors reduced their expectations of rises in interest rates. Investors have dumped the pound today on the back of this data.
George Osborne, the Chancellor of the Exchequer has been speaking throughout the day, insisting that these were skewed by the snow and that the Government will continue with the planned cuts to public spending,
“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,” the Chancellor said. “We will not be blown off course by bad weather.”
In other more upbeat news, the public sector net borrowing increase was lower than expected, coming in at £16.8bn in December. This is expected to improve the credibility of the borrowing targets set by the Office of Fiscal Responsibility and has eased concerns about the coalition government’s ability to reduce the budget deficit. The only problem now is doing it in a way that doesn’t pull the country back into recession.
