MercoPress. South Atlantic News Agency

United Kingdom Economy Shrinks Fuelling Fears of Recession

United Kingdom Chancellor George Osborne stands by his financial policies, in spite of figures which show the UK economy has shrunk by 0.5 percent and concerns Britain is facing a recession.

The gross domestic product (GDP) fell, 0.5pc in the fourth quarter of 2010, the most in more than a year, the Office for National Statistics reported on Tuesday. The decline compared with growth of 0.7pc in the third quarter.

George Osborne insisted that the Government will press ahead with planned cuts to public spending, despite warnings from forecasters that the economy may be too weak to withstand the package.

Blaming the growth figures on the cold weather, Osborne maintained that a weakening in efforts to tackle the deficit would pose a greater bigger threat to the nation's future prosperity.

Economists expressed fears Britain is heading for a double-dip recession and a bout of Seventies-style 'stagflation' - a painful mix of weak growth, high unemployment and rising inflation.

Consumer inflation last week came in higher than expected at 3.7% in December.

Hetal Mehta of Daiwa Capital Markets called it 'a horrendous figure': 'An absolute disaster for the economy,' she added.

“While today's GDP figures are backward looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. It seems that the economy is incredibly vulnerable.

“And with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride.”

The fall in the GDP will shake confidence in the ability of the private sector to pick up the slack in the economy Osborne's austerity cuts kick in this year - support for which could be tested severely if some revival in growth is not indicated in the coming months.

The decline in GDP was driven by a 0.5% drop in the key services sector, which makes up more than 75% of the total economy. With this drop, total growth in 2010 stands at 1.4%, far below analysts' forecasts.

The pound suffered on the currency exchanges as the news saw forex traders sell off sterling. The pound fell by 2.5 cents against the dollar, from $1.600 to $1.575, and by 1.4 cents against the euro, from €1.172 to €1.158.