THE BRITISH chancellor of the exchequer George Osborne’s hopes that economic growth will mask the impact of £80 billion in spending cuts over the next four year has been dealt a blow after new economic statistics show the UK economy shrank by even more than had been first thought in the final three months of last year.
Initially, the Office of National Statistics had calculated that the UK economy had contracted by 0.5 per cent, which it blamed largely on the heavy snows; but it now calculates that the shrinkage was slightly worse, at 0.6 per cent. More worryingly the statistics showed government spending was the only driver of growth.
Exports fell by 2.3 per cent, though it is possible that some of this could be put down to difficulties shipping product during the snows. However, the British government’s hopes for an export-led recovery depend to a large extent on sterling falling in value. Yesterday it fell against the dollar, the euro and the yen.
The latest figures have complicated life for Bank of England governor Mervyn King, who has signalled he will raise interest rates slowly this year to curb rapidly accelerating inflation, but such a move could strangle signs of life in the economy, economists fear.
Economists expect that gross domestic product in the UK will increase by 0.7 per cent between January and March, when Mr Osborne will deliver his budget, although retail surveys in recent days have given contradictory signals about the public’s spending habits, with some showing that January’s increase in VAT and fears about their own futures is curbing some spending.
Analyst James Knightley of ING said: “The detail shows that government spending was the only positive growth driver. This is fairly worrying given what we know about the wave of fiscal austerity that is now starting to hit the UK economy.
Certainly the bad weather played its part and we should get a bounce-back. However, the Office of National Statistics has already stated that stripping out bad weather activity was fairly flat in the fourth quarter, so we shouldn’t overstate the case for a large weather effect rebound,” he said.
The latest figures, which are based on three-quarters of all available data being analysed, may give those on the Bank of England’s monetary policy committee who had been arguing for speedy interest rises “pause for thought”, said Vicky Redwood of Capital Economics.
“The recent MPC minutes had flagged the possibility that the data would be revised up, but in fact the drop in GDP was revised from 0.5 per cent to a bigger 0.6per cent. And given that the ONS kept its estimate of the weather impact at 0.5 per cent, this means that underlying growth was marginally weaker than previously thought,” she said.
