January 25, 2011

British GDP in Q4 Takes Unexpected Drop of 0.5%

Finance minister blames unusually bad weather, defends austerity plan

Figures released Tuesday delivered a shock to markets as Great Britain’s economy dropped 0.5% in Q4 of 2010. The unexpected bad news caused the pound to tumble, losing 1.5% in early trading, and the FTSE to follow, with a drop of 0.6% by mid-morning.

Reuters reported that George Osborne, Britain’s finance minister, blamed the fall on the weather; December was the worst on record for England. He also said he did not intend to change his austerity plans for the nation. However, the Office for National Statistics said that even without the weather factor, there would have been little if any growth to record. That news sent investors scrambling to cut losses before spending cuts further threaten economic recovery.

Daiwa economist Hetal Mehta said in a statement, “This is a horrendous figure. An absolute disaster. It seems that the economy is incredibly vulnerable. And with the fiscal tightening yet to fully bite, we have to brace ourselves for a bumpy ride.” A planned increase in the VAT for January was seen as further exacerbating economic woes. With Britain the first country to report Q4 economic data, worries about the viability of a global recovery are rising.

Economists had predicted an increase in Britain’s economy of 0.5%; forecasts were anticipating growth of between 0.1% and 0.6%. Tuesday’s release of anticipated UK growth figures for 2011 by the International Monetary Fund (IMF) of 2.0%, while lower than its predictions for other nations, now looks too rosy.

Osborne insisted that weather was the cause and refused to reconsider public spending cuts, further saying, “There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month.” However, the service and construction sectors were especially hard hit for the quarter, with construction losing, at 3.3%, the most for a quarter since the recession-plagued beginning of 2009.

Concerns over stagflation and interest rate worries also took their toll; the sterling short FSSM1 contract for June saw its greatest one-day gain since the budget last June. Investors no longer see a rate hike in May as likely. Stuart Green, economist at HSBC, said, “We have been of the opinion that the Bank of England should not raise interest rates until the first quarter of next year. I think the data really confirms the idea that, given the headwind the economy is facing, that this monetary stimulus is still required.”

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