British economy suffers shock slump

Britain's economy shrank by a surprise 0.5 percent in the fourth quarter of 2010, dashing expectations for modest growth, as the nation's fragile recovery was hit by harsh wintry weather.

The unexpected slump, which has ended one year of growth, re-ignited market concerns that the country could be heading for a double-dip recession as state austerity measures also take their toll, analysts said.

Gross domestic product (GDP) fell 0.5 percent in the three months to December, after expansion of 0.7 percent in the third quarter, the Office for National Statistics (ONS) said in a statement.

That was the first drop since the third quarter of 2009 and confounded expectations for 0.4-percent growth in the fourth quarter, said Dow Jones Newswires.

"The GDP figure is quite simply a shock to the system and heightens fears that the coalition government's austerity plan may well curb growth too excessively and send the UK into a double-dip recession," said Joshua Raymond at City Index in London.

The technical definition of a recession is two or more successive quarters of economic contraction.

The British pound slumped and the London stock market dropped in reaction to Tuesday's data, as dealers predicted that the Bank of England would not risk raising interest rates to curb inflation.

The growth data was meanwhile published as the International Monetary Fund said that global economic recovery was gaining traction but is "still at risk" because of eurozone debt worries and a lack of financial reform.

The Washington-based institution said a two-speed recovery -- with advanced economies growing at a significantly slower pace than emerging economies -- was shifting gears as tax cuts in the United States boosted consumption.

In Britain, the ONS said that British services and construction fared particularly badly in the fourth quarter.

British finance minister George Osborne argued that the GDP data was skewed by heavy snowfall and freezing temperatures last month.

"These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December," Osborne said in response.

"We have had the coldest weather since records began in 1910 -- and this has clearly had a much bigger impact on the economy than anyone expected."

However, the ONS also revealed that growth would have stood at zero in the fourth quarter, if the impact of the bad weather was removed, stoking concerns about the broader health of the economy.

Analyst Jonathan Loynes, at consultancy Capital Economics, added that the economy's fragile state posed "serious questions" over the government's austerity drive.

"Although heavily affected by the weather, the UK's shockingly bad Q4 GDP figures ... raise serious concerns over whether the economy is in a strong enough position to withstand the fiscal tightening," he said.

However, Chancellor of the Exchequer Osborne defended his coalition government's ongoing plans to slash a huge public deficit and avoid an Irish-style debt crisis.

"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis," he said.

Separate data showed that British state borrowing fell markedly in December -- but still stood at a hefty £16.8 billion (19.5 billion euros, $26.5 billion). The figure compared with borrowing of £21 billion in December 2009.