By Max Clarke

The Gross domestic product preliminary estimate for the Fourth Quarter 2010 published today by the ONS shows the UK economy experienced a contraction of 0.5% compared to the same quarter 2009. Third quarter figures reported 0.7% growth, leading commentators to explain the sudden drop in GDP as being partly an effect of December's bad weather.

Responding to the figures for the fourth quarter which indicate a 0.5% drop in GDP, David Kern, Chief Economist at the British Chambers of Commerce (BCC) has commented:

“The fall in GDP in the fourth quarter is worrying and well below everybody’s expectations. Even if you accept the assessment from the Office of National Statistics (ONS) that underlying growth was flat before the impact of the severe weather, the outcome is very disappointing.
“There are positive features in these figures, notably the strong growth in manufacturing. However the decline in services is of concern and could have an adverse effect on jobs.

“In spite of these figures we believe the government should persevere with the deficit cutting programme, but the economy is clearly fragile and policy must be implemented cautiously. The Monetary Policy Committee must abandon any early interest rate rise until the recovery is more secure. On its part, the government must ensure obstacles that hamper businesses in their efforts to create jobs, invest and export must be removed.”

Jeremy Cook, chief economist at World First has also commented, saying:

“Sterling has been seriously destabilised by these figures and traders are now abandoning all hope that the Bank of England will raise interest rates sooner rather than later.
“This opens the door to ‘stagflation’ a combination of high inflation and stagnant growth which would see the economic recovery snuffed out.

“To be honest, although this is only a preliminary figure, this is a real shocker.”

Dr John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD) also commented on the government policy implications of the figure:

“As for policy, the GDP figure will add to the dilemma currently facing the Bank of England as it decides how to cope with the twin pressures of seriously below trend economic growth and above target inflation. The CIPD hopes that today’s figures will deter those calling for higher interest rates.

“The Government, meanwhile, would be well advised to use today’s figure as an opportunity to reconsider what appears to be a ‘sat-nav’ approach to fiscal policy. Pursuing a fixed course of cuts in public spending and tax increases regardless of obstacles and bumps in the road is not sustainable — particularly in the face of fairly large bumps like this. If the economy continues to underperform and unemployment soars in the coming months, the Government will need to make clear that it is willing to adopt a more flexible policy for cutting the fiscal deficit.”