Initial estimates have shown that the UK GDP suffered a 0.5% contraction in the 4^th quarter of 2010. This follows four straight quarters of growth. The contraction came as a shock with most economists predicting an expansion of between 0.2% and 0.6%.

The reduction in GDP was largely brought on by the unusually cold weather which saw weak Christmas shopping as well as a 3.3% reduction in the construction sector. However, according to the office of national statistics, the economy would have been ‘flattish’ even without the bad weather. High inflation, tax rises and cuts to public spending have all contributed to the poor numbers.

Sterling dropped significantly on the data falling to $1.57. George Osborne, the chancellor, stated that he will not be blown off course in public spending cuts aimed at removing the UK’s budget deficit by 2015.

The news has put further pressure on the Bank of England over further quantitative easing and future interest rate rises. Inflation is already above 3% and rising in the UK. However the Bank of England is reluctant to raise rates to control inflationary pressure until the economy is on a more steady growth path.

At present the best performing sector in the UK is manufacturing which is added by the low value of sterling. Rate rise could see the value of sterling climb damaging manufacturing.