Britain's economy contracted even faster than previously thought at the end of last year after the first fall in household spending in 18 months, denting expectations for an imminent rise in interest rates.

Official data Friday showed the economy shrank 0.6 percent between October and December, worse than an initial estimate of a 0.5 percent decline and against analysts' forecasts for an unchanged reading.

Most of the decline was due to severe weather in December, and the government said the figures would not throw its deficit-busting program off track. It noted that survey data so far this year had exceeded expectations.

Nonetheless, the surprisingly weak data reinforce the case of those on the Bank of England's Monetary Policy Committee who think it is premature to start raising interest rates when the economy still faces severe headwinds.

The pound fell a third of a cent against the dollar and hit a one-month low against the euro as investors scaled back bets on a rise in interest rates in the next two months.

The slight downward revision might give the more hawkishly inclined members of the MPC reason to pause for thought, said Capital Economics analyst Vicky Redwood.

Given that the ONS kept its estimate of the weather impact at 0.5 percent, this means that underlying growth was marginally weaker than previously thought.

However, many analysts said they still expected the BoE to start tightening policy in May to tackle inflation, which is currently running at double the central bank's 2 percent target.

I think May is still on the cards, said Richard Barwell, economist at RBS. This is one bad quarter and we think it will come back in Q1.


While sticking to its line on the impact of the coldest December in a century, the Office for National Statistics said the downgrade to GDP was mainly due to lower production and services output than it estimated last month.

A breakdown of the figures showed household spending fell 0.1 percent, the first decline in 18 months, and suggesting that Britons were tightening their belts even before the rise in VAT sales tax at the start of this year.

That chimes with recent surveys showing consumer morale remains in the doldrums. Stores have also been having a hard time, with retail bellwether John Lewis Friday reporting a fifth consecutive week of poor sales.

A survey by the Confederation of British Industry on Thursday showed retail sales grew at their slowest pace since last June, and looked set to deteriorate further.

Friday's ONS data showed output in the services sector was revised down to show a fall of 0.7 percent from 0.5 percent previously. Industrial output was revised down to show a rise of 0.7 percent compared with 0.9 percent.

Meanwhile, price pressures surged, with the implied deflator shooting up to 1.0 percent on the quarter from 0.3 percent in Q3 2010.

Imports rose at their fastest pace in 18 months, outpacing exports and resulting in net trade subtracting 0.3 percentage points from GDP.

Without government spending, which rose by 0.7 percent on the quarter, the contraction in overall GDP would have been even sharper.

This is fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the UK economy, meaning that we will soon be starting to see negative figures for this component, said James Knightley, economist at ING.