The United Kingdom’s economy suffered an unexpected .5% contraction in the last quarter of 2010, according to Office for National Statistics (ONS). This is a rather unexpected and surprising development as the financial experts predicted a growth of .2%-.6%. Though the decline has been attributed to hostile weather conditions but the performance of the economy has been rather disappointing even if we exclude the impact of the weather. Questions are being raised about the future of the economy particularly because a substantial cut in public spending will follow this contraction. The high rate of inflation has also raised further concerns about the UK’s growth. Meanwhile, the value of sterling has declined sharply as the ONS announced that the national growth has contracted. However, the government is determined to stick to its austerity economic policies.
The contraction is visible mostly in the construction industry where the activity has declined by more than 3% in the last three months of 2010. It was expected that with the fall, retail sales would take a hit but the blow to the construction industry came as a surprise. The manufacturing industry remains the sole ray of hope with a growth rate of 1.4%.
The government has made it clear that change in fiscal policies is not on the cards. Quoting ONS, the government sources said that the contraction was caused exclusively by the horrible weather. They further added that the current fiscal policies have gained Britain credibility at the international level and helped the country to combat economic crisis. Quite clearly, the government refuses to back off just on the basis of a quarter’s performance.
However, the Governor of Bank of England along with other economists, contradict the above statements. They argue that though the economy was growing till the middle of the year, things have changed since then. Inflation is shooting up, unemployment and consumer debt is on the rise and people are opting for debt management programs. Though the government claims that the economy is back to its feet, the real story is something different. Questions are being raised about the efficiency of the government’s deficit reduction program. The UK government is highlighting the fact that public sector borrowing has been significantly less in December (£16.8bn). But the Chamber of Commerce believes that the current figure is still way too high.
The contraction also reflects the dilemma which the Bank of England is currently experiencing. It needs to raise the interest rate to curb inflation but is hesitating to do so as the question of the UK’s economic recovery is not yet settled. Noted economists like David Kern opine that the interest rate should be raised only when the economy becomes more stable. They also suggest that the government should clear all impediments which might stop the corporate houses from creating job opportunities or discourage them from investment.
The contraction of the U.S economy has made everyone apprehensive. On top of that, GDP figures confirm that Britain’s economy is still vulnerable. With the government emphasizing on fiscal austerity, we should expect a tough time ahead of us.