UK economy contracts for the first time in a year

The UK suffered its first contraction in GDP for a year in the last quarter of 2011, with GDP falling slightly more than expected, by 0.2% against most expectations for a fall of 0.1%.

The fall in GDP had been long expected given the headwinds facing the services sector and the breakdown of activity in the Eurozone, a large UK trading partner. As such, the contraction in Q4 was inevitable.

At the very least, the negative GDP reading will keep the pressure on both the Coalition government and the Bank of England to re-ignite the faltering UK economy through additional stimulus measures, though with such a heavy reliance on Europe as a large UK trading partner, the UK’s economic fate lies in the hands of Brussels as much as London.

However, should todays GDP reading escalate fears significantly of a marked period of negative quarterly UK GDP? Perhaps not. The real concern for now remains the prospect of aneamic UK growth in the medium term than of a prolonged period of negative quarterly GDP.

More QE on the way appears likely That said, today’s GDP data release from the Office of National Statistics, alongside minutes from the latest MPC meeting at the Bank of England strongly suggests that the UK’s Central Bank will now inject more firepower to help the UK stave off a prolonged period of negative GDP through more quantitative easing.

There is every chance that next month, when the UK Central Bank will digest the latest quarterly inflation report, could announce an additional £75bn worth of asset purchases to reignite the UK economy and data from today’s GDP or MPC minutes appears to emphasise this fact.

We saw stocks fall off in reaction to the worse than expected GDP reading, with the FTSE 100 trading down by 20 points on the day, whilst the pound sterling was broadly unchanged. The lack of significant market reaction is likely to be down to the fact that today’s data will have been of no real surprise to most investors.