According to the data released today, UK economy contracted in the final quarter of 2010 by 0.5%. British GDP fell for the first time in 5 quarters. This happened due to the slump in the leading industries – construction and service sector. The coldest December in a century played some negative role as well.

Analysts' consensus forecast was for growth only to slow to 0.5% from 0.7% in the third quarter, though uncertainty over the impact of December's snow disruption meant the range of forecasts ranged from 0.1 to 0.6%. Daiwa economists regard such poor performance as “an absolute disaster for the economy”.

The situation in the country is difficult as UK inflation at 3.7% is almost 2 times higher than the Bank of England's target. It’s also necessary to take into account that Britain's economy got in trouble even before the government starts to cut public spending in earnest in 2011. Finance Minister George Osborne claimed that the shrinking economy was no reason to cancel public spending cut blaming solely the cold month for the bad results.

Gilt prices and short sterling futures jumped as investors dampened expectations that the Bank of England would opt for an early rise in interest rates to stem inflation. Economists at HSBC claim that they been of the opinion that the Bank of England should not raise interest rates until the first quarter of next year and the data really confirms the idea that, given the headwind the economy is facing, that this monetary stimulus is still required.



Chart. H4 GBP/USD

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