UK GDP in new blow

The economy contracted even faster than previously thought in the last three months of 2010, shrinking by 0.6 per cent, after downward revisions to industrial and services output, official data showed on Friday.

The figures may make Bank of England policymakers think twice about raising interest rates, although there have been signs that activity picked up at the start of this year following December's snow-related disruption.

Analysts had expected an unchanged reading of -0.5 per cent.

The Office for National Statistics said the downgrade was mainly due to lower production and services output than it estimated last month. It stuck to its estimate that severe weather in December – the coldest in a century – accounted for 0.5 percentage points of the decline.

The figures highlight the dilemma facing the Bank of England which needs to steer inflation back to target but is reluctant to raise interest rates when a sustained recovery is far from assured.

A breakdown of the figures showed household spending fell 0.1 percent, the first fall in 18 months. The fall shows households were tightening their belts even before the rise in VAT sales tax at the start of this year and an intensification of the government's spending squeeze.

Output in the services sector was revised down to show a fall of 0.7 per cent from 0.5 percent previously. Industrial output was revised down to show a rise of 0.7 per cent compared with 0.9 per cent.