UK's economic shrinkage shrinks

The UK economy shrank by slightly less than was previously thought in the final three months of last year.

The Office for National Statistics' third and final estimate of real gross domestic product (GDP) growth showed a contraction of 0.5 per cent in the fourth quarter of 2010. That compares with its previous estimate of a 0.6 per cent decline.

The ONS has previously said that the bad weather dragged output down by 0.5 per cent, suggesting GDP would have been flat without the snow.

Economists expect a

bounce-back in the first quarter of this year thanks to a backlog of economic activity displaced from November and December, but are cautious about the longer-term prospects.

Howard Archer, chief European & UK economist at IHS Global insight, said the economy suffered a "marked loss of momentum" at the end of 2010, which could not be attributed solely to the bad weather.

"The GDP breakdown does little to soothe nerves over the economy's underlying strength," he added. "The only positive growth came from government spending and that is now in the process of being reversed."

Consumer spending also remains a cause for concern. The ONS data shows that real household disposable income fell 0.5 per cent in the last quarter of 2010.

Consumer spending accounts for 60 per cent of GDP, and with incomes being squeezed by higher inflation this year, the government has already revised its estimate for GDP growth in 2011 downwards, to 1.7 per cent.

Scott Corfe, economist at the Centre for Economics and Business Research, said even that now looked optimistic.

"The economic fundamentals for 2011 are poor," he said.

"The decline in real household disposable income will almost certainly continue in the first quarter of 2011."