The UK economy has unexpectedly shrank dramatically in Q4 of 2010 as construction slumped. The December Snow did little to help things yet negative growth in the UK now signals that the UK could be set for a double dip recession.

GDP fell 0.5% after rising 0.7% in the previous quarter, the office for National statistics announced today. Most economists were predicting a positive 0.5% figure. The pound plummeted on the news losing in excess of 1% against most of the majors. This news is a real blow for the UK economy and shows that the UK was struggling even before David Cameron introduced the 20% VAT rate. This alongside other severe austerity measures could now force the UK economy into negative territory for Q1 in 2011.

Tomorrow sees the release of the BoE minutes from their last policy meeting. The expectation is that the BoE will hold off raising rates in the near term in order to curb inflation. An interest rate rise would almost definitely push the UK economy back into the recession.

The likelihood is that the UK economy will now suffer from a period of stagflation; low economic growth, low interest rates, high inflation and high unemployment. Markets are concerned that poor weather is not the only reason for the news and that this could now progress into a very bad year for the UK economy. Quantitative easing may be required to get things back on track and a number of analysts are now suggesting that George Osborne was foolish to think that aggressively cutting the budget deficit was the right move arguing that UK growth and employment should have come first.

All eyes will be on the minutes tomorrow and we can expect another volatile day.

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”

Torfx Currency Dealer
Luke Zorab