UK economic slowdown even worse than thought

Britain's economy contracted even more sharply than thought during the final three months of last year, official figures revealed yesterday, dashing hopes that initial estimates of fourth quarter performance would prove to have been overly pessimistic.

The Office for National Statistics said the economy shrank by 0.6 per cent during the final quarter of last year, rather than 0.5 per cent as it said last month. While the revision is small, it was seen as a major blow to the Chancellor – economists had expected the figure to be revised upwards once the ONS took into account returns from parts of the economy less badly hit by the terrible weather that caused so many problems in December.

Ed Balls, the Shadow Chancellor, said the data undermined George Osborne's insistence that Britain had to press ahead with his aggressive plans for cutting the deficit. "We now face the worst of all worlds – unemployment and inflation both rising, growth stalled and consumer confidence collapsed," he said. "And this is before the Government's extreme fiscal tightening really starts to bite."

However, a spokesman for the Treasury said the revision would not affect policy. "The Chancellor said that the fourth-quarter growth figures were disappointing and today's revision doesn't change that fact," he said.

The ONS data reveals there was a deterioration across the whole of the private sector at the end of last year. The body also stuck by its estimate that the weather had been responsible for a 0.5 per cent contraction, suggesting that the economy would have shrunk even without the snow.

The service sector, accounting for two-thirds of the economy, declined by 0.7 per cent in the final quarter, a figure revised down from 0.5 per cent, while manufacturing fell 0.7 per cent. With construction slipping 2.5 per cent, only government spending – set to be cut this year – prevented an even more serious overall contraction.

Nervousness about the outlook for the British economy was also heightened yesterday by the US's announcement that its growth in the final quarter was markedly slower than previously estimated. US growth was 2.8 per cent on an annualised basis over the final three months of the year, revised down from 3.2 per cent.

Economists said they continued to have some doubts about the British data, but that the setback would make it harder for the Bank of England's Monetary Policy Committee to raise interest rates – and raise the pressure on the Chancellor to reconsider his fiscal policies. While the economy is thought to have returned to growth in January, the picture remains mixed, with poor data on retail sales and consumer confidence published in the past few days.

Vicky Redwood, senior UK economist at Capital Economics, said: "We still think the economic recovery will struggle this year and expect growth of just 1.5 per cent or so [compared to the official forecast of 2.1 per cent]."

The MPC at war

The increasingly fractious debate between members of the Bank of England's Monetary Policy Committee – split four ways last month over the right course for policy – continued yesterday with a trenchant defence of the case for holding interest rates steady from Adam Posen.

Mr Posen, who last month voted for a new stimulus to the economy in the form of a renewal of the Bank's quantitative easing programme, spoke out just hours after Andrew Sentance repeated his calls for a rise in the cost of borrowing in a speech entitled "10 Good Reasons to Tighten".

Mr Posen said he did not accept the argument that inflation has now been above target for so long that rising expectations about the cost of living in the future would drive a spiral of higher wage demands. "[Wage growth is] going to be very low for the next couple of years," he said. He also rejected claims high inflation would persist without the type of action for which Mr Sentance has called. "I don't think that's what's going to happen," Mr Posen said. "It is fundamentally uneconomic to believe that markets do not adjust."