Economy shrinks by 0.5% - is this the prelude to a double-dip?

ONS figures have shown a contraction in the UK's GDP - which isn't just down to the wrong kind of snow.

by Emma Haslett
Last Updated: 06 Nov 2012
Have the doom-mongers been right all along? Figures released today by the Office for National Statistics have shown that the nation’s GDP contracted by 0.5% in the final quarter of 2010, taking us one step closer to the dreaded double-dip. The news sent the pound into a spin, with Sterling falling by 1.3% to $1.5785, and losing 1% against the euro. The FTSE 100 reacted similarly, falling by 0.6% by late morning.

What’s to blame? The ONS has put it down to the effects of December’s cold weather, but it’s taken the City by surprise – despite the snow, analysts had actually predicted growth of 0.5%. So although everyone agrees the weather has almost certainly had some impact, the question is how much.

The figures seem clear about that: the industries which showed the largest contractions were also the ones which are most likely to be sensitive to bad weather. Thus, distribution (which includes retailers – several of which have already issued profit warnings) saw a drop of 0.5%, while the hotel and restaurant industry saw a similar fall, and growth in business services and finance fell flat, compared to a rise of 0.3% last quarter.

But that’s not the whole story: the ONS pointed out that even with the impact of the weather taken out, growth would still have been ‘showing a flattish picture’. So we can’t place the blame entirely on the snow.

The other obvious cause is the spending cuts. Slicing £81bn off the country’s budget must surely have had some impact. But Chancellor George Osborne wasn’t having any of it: ‘The ONS has made it very clear that the fall was driven by terrible weather,’ he said. ‘There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month.’ So the general feeling in the Coalition is that as long as the weather doesn’t get worse again, chances are we can get back to growth, even if that is only ‘flattish’.

By that reckoning, the economy should sort itself out of its own accord as people settle down and get used to the aftermath of the spending cuts. But there’s another fly in the ointment: inflation, which, at 3.7%, is still significantly higher than the Bank of England’s 2% target, and is expected to climb even further. There has been increasing pressure on the BoE to raise interest rates (which would help to slow it) as the inflation figure has crept up – but with the new GDP data, that might become more difficult. As Markit chief economist Chris Williamson pointed out, it will ‘surely cause the BoE’s Monetary Policy Committee to pause for thought’ before it raises interest rates.

The good news, though, is that we haven’t officially gone back into recession – you need two consecutive quarters of contraction for that. So all eyes are on next quarter. Watch this space (and pray it doesn't rain)...

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