The U.K. economy contracted unexpectedly in the closing months of 2010 as severe winter weather weighed on growth, according to The Daily Telegraph. On Tuesday, the Office for National Statistics reported that gross domestic product in the U.K. was 0.5% lower in the fourth quarter of 2010 than the previous three months, reversing growth of 0.7% the month before and shocking economists who had been expecting 0.5% growth.
The headline figure was seen as horrendous by Hetal Mehta of Daiwa Capital Markets Europe, and increase pressure on the Bank of England to devise a plan to simultaneously address weak growth and high inflation. Andrew Sentance of the central banks Monetary Policy Committee voiced a strong call for raising interest rates soon in order to avoid a big shock to business and consumer confidence further down the track if a more drastic response becomes necessary. However, the weak growth data suggests the economy may not be able to support fiscal tightening.
Meanwhile, the government spending cuts are looming large, further increasing concerns about the outlook for the uneven economic recovery and raising questions as to whether the government should scale back planned cuts. Finance Minister George Osborne said on Tuesday that leaders would not consider changing planned austerity measures, warning that such a response would be a huge mistake because that would push us back into a financial crisis.