UK GDP contracts deeper than expected at -0.3% in fourth quarter

<p>UK growth contracted deeper than expected in the fourth quarter by -0.3% when GDP had been expected to contract -0.1%. The figures showed that the […]</p>

UK growth contracted deeper than expected in the fourth quarter by -0.3% when GDP had been expected to contract -0.1%. The figures showed that the UK failed to grow at all in 2012.

This is a disappointing growth number and will naturally cause alarm bells to ring that the UK could enter a triple dip recession. For that to happen, Q1 2013 GDP must also see a contraction. It remains to be seen how much of the widespread snow and travel disruption may threaten the economy’s ability to bounceback from this Q4 contraction but close attention will need to be paid to services and production data over the next month.

Despite the disappointment, there had been fears this could have been a much worse reading to the tune of a 0.5% contraction.

Breaking down the GDP numbers, one of the drags on the figures was output from North Sea, with a 10.2% decline in mining and quarrying output, which was the biggest decline since records began in 1997. This contributed to 0.18% of the 0.3% contraction whilst government services also contracted by 0.7%, the biggest fall since the second quarter of 2008.

Expected revisions
It must be said that there is historically some degree of volatility in the preliminary reading. Of the last twelve quarterly GDP readings, only once has the preliminary reading not been revised by the time each quarterly GDP has been confirmed. As such, we should take this number with a pinch of salt and expected revisions.

The market reaction
The market reaction to the GDP number was mixed. The FTSE 100 was left relatively unchanged whilst the pound sterling took the brunt of the disappointment. The pound fell 50pips to $1.5760 against the US dollar, with traders now expecting the deeper contraction to add pressure on the Bank of England to increase asset purchases, despite the minutes from the last MPC meeting showing distaste for immediately increases in stimulus.

It is unlikely that this latest GDP number will force the BoE into action, who will likely wait for the revised figures before deciding upon their next move.

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