UK economic contraction worse than thought

AP News
Posted: Feb 25, 2011 7:12 AM
UK economic contraction worse than thought

The British economy shrank more than previously thought in the final quarter of 2010, according to revised figures released Friday, dealing a further blow to the country's shaky recovery from recession.

The Office for National Statistics reported that gross domestic product declined by 0.6 percent between October and December. It had previously put the contraction at 0.5 percent.

The agency said that severe winter weather in December, when Britain was hit by heavy snowfalls, is still largely to blame for the plunge in the final three months of the year.

But the data also showed that household spending declined 0.1 percent _ the first drop since the second quarter of 2009.

The agency's chief economist, Joe Grice, said it was a small revision, rather than a shock and the Statistics Office believed that stripping out the weather effect left the contraction at around 0.1 percent.

"The overall picture is still a flattish underlying economy in the fourth quarter," Grice told the British Broadcasting Corp.

But other economists said the data was concerning, particularly as harsh spending cuts from the Conservative-led coalition government are yet to filter through.

"It is true that activity was hit appreciably by December's severe weather and the signs are that activity did bounce back in January," said IHS Global Insight chief UK economist Howard Archer. "Even so, major question remarks remain over how the economy will fare over the coming months as the fiscal squeeze increasingly bites. In particular, there are currently growing signs that consumers may be reining in their spending in the face of serious pressures."

Britain is facing 80 billion pounds ($128 billion) of public spending cuts by Prime Minister David Cameron's government as it struggles to get the country's massive budget deficit under control.

Cameron has already lifted sales tax from 17.5 percent to 20 percent in a bid to raise an extra 13 billion pounds ($20.25 billion) for the country's coffers this year. More painful measures are still to come, including spending cuts on services like welfare and a rise in the retirement age.

Economists have warned that unemployment is likely to soar, house prices to fall further and inflation to rise.

"It's time to wake up and smell an economy in big trouble," said Brendan Barber, the general secretary of the Trades Union Congress, which represents some 6 million workers. "We need a plan B that doesn't send it over the edge with deep rapid spending cuts."