Shock contraction in UK economy

Bad weather in December is expected to have affected pre-Christmas economic spending

Figures for the UK’s economic growth over the last three months of 2010 are expected to remain weak, economists have warned.

The GDP figures, due to be released at 0930 GMT, are expected to show growth of between 0.2% and 0.6% in the three months up to December.

There was 0.7% growth in the previous three months and 1.1% in the second quarter of 2010.

The government says the figures show that Britain on the road to recovery.

Howard Archer, chief UK and European economist at IHS Global Insight, said there was considerable uncertainty over how much December’s severe weather hit overall activity.

As a result, the range of forecasts is wide, from 0.2% to 0.6%.

The National Institute of Economic and Social Research has projected that output grew 0.5% in the period under review, and the British Chambers of Commerce has forecast a figure of 0.6%.

The “consensus figure”, drawn from a range of forecasters, is that the Office of National Statistics (ONS) will announce a 0.4% increase in growth in Q4 of 2010.

Business Secretary Vince Cable said a “key driver” of government policy in the last year had been sorting out the public finances.

“We had to do that, and it’s been done. Confidence has been restored and we can now set in process the long-term policies that we need to get economic growth,” he added.

“And that is about focusing on building up manufacturing, supporting apprenticeships, supporting technological innovation – those are all things we are now doing.

“But it’s a long term project, you know the British economy’s been badly distorted for many years, with too much growth focused on the south-east, focused on property, not enough on manufacturing and not enough on exports, and getting that right is a big long-term project”.

The Office for Budget Responsibility – set up by the government to make independent forecasts – says the economy will grow by 2.1% this year, slightly more than in 2010.

The ONS will also release public borrowing figures for December, which are expected to reveal the nations fell further into debt by the sum of £21bn, meaning a total for the financial year to date of about £125bn of debt.

Sir Richard Lambert, the outgoing boss of the business body CBI, had earlier accused the coalition of failing to come up with policies that support economic growth.

“It’s failed to articulate in big picture terms its vision of what the UK economy might become under its stewardship,” he said in a speech.

Sir Richard said business supported the government’s spending cuts, but some politically motivated initiatives were damaging, he said.

The government has “taken a series of policy initiatives for political reasons, apparently careless of the damage they might do to business and to job creation”, Sir Richard said in his last major speech before his departure on Friday.

Spending cuts and initiatives such as this month’s VAT increase from 17.5% to 20% would help fix the UK’s structural deficit over time, Sir Richard said.

“But to bring the public finances back to full health, they will have to be accompanied by increased output and employment – which bring with them higher tax revenues,” he stressed.

“Public spending cuts and private sector growth are two sides of the same coin.”

Sir Richard Lambert: “We have to have growth in employment”

Hence, without initiatives supporting private sector growth, the spending cuts would not only be futile; they would be actively detrimental, he reasoned.

Ed Balls, Labour’s shadow chancellor, urged the government to heed the warning from Sir Richard.

“These are damning criticisms from such a respected figure in the business world,” he said.

Len McCluskey, Unite general secretary-elect, also agreed with Sir Richard’s assessment.

“It’s not often that Unite and the CBI find common ground in criticising the government,” he said.

“Sir Richard’s views are a major wake-up call for David Cameron and George Osborne; the medicine they’re feeding the patient will kill, not cure.”

Bank of England governor Mervyn King is expected to mention his concerns over inflation in a speech in Newcastle on Tuesday evening.

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