UK GDP contracts a ‘shocking’ 0.5% in fourth quarter

London - 25 January 2011

• Sterling slumps across the board
• News is a ‘real disaster’

Sterling slumped against a basket of currencies this morning after UK GDP contracted a shocking 0.5% in the fourth quarter of 2010. The Office for National Statistics also revealed that the economy grew 1.7pc year on year, much less than the 2.6pc forecasted. Economists blamed the contraction on the wintry weather that affected most of Britain in December.

The pound fell nearly a full cent against the US dollar to a session low of 1.5770, and 0.84pc against the euro to 1.1612.

Mark Bolsom, Head of the UK Trading Desk at Travelex Global Business Payments, commented, “We knew that snow had seriously impacted retail sales in December but this will come as a massive shock; nobody expected contraction.

“It’s a real disaster, given that January’s VAT hike will drain even more money out of the system. And whilst there had been talk of an interest rate hike, this is surely now off the agenda. Quantitative Easing is now back on the cards.

“Economic contraction is a really bad way to go into a period of heavy fiscal tightening and is not what the government would have wanted at all. The Chancellor may find himself having to defend his economic plans over the coming days.”

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