The spectre of a double-dip recession was raised last night after official figures revealed the UK economy unexpectedly shrank in the fourth quarter of 2010.
The severe weather last month was blamed for the shock 0.5% plunge in gross domestic product (GDP) from October to December.
Experts warned rising fuel prices and the unpopular VAT increase, combined with the UK Government’s austerity measures, would seriously threaten the prospects for economic recovery in 2011.
Bank of England governor Mervyn King last night admitted the recovery would be “choppy” with inflation rising to between 4% and 5% over the next few months.
He said wages in real terms will fall back to 2005 levels as prices soar and the government’s cutbacks take effect – but insisted the economy was “well placed to return to sustained, balanced growth”.
Business leaders called on politicians north of the border to act now to prevent Scotland from bearing the brunt of a prolonged slump.
Chancellor George Osborne remained defiant and said the coalition would not allow his plans for fiscal tightening to be “blown off course by bad weather”.
But First Minister Alex Salmond said the figures represented a “wake-up call” for the coalition which threatened to drag Scotland into a “very serious” situation.
The FTSE 100 Index and pound fell after the Office for National Statistics (ONS) published the figures.
Economists had expected growth of between 0.2% and 0.6% in the fourth quarter, but even without December’s Arctic weather the ONS said growth for the three months would have been flat.
The services sector took a particularly severe hit, declining 0.5%. And total growth in 2010 was 1.4% – far below analysts’ forecasts.
The contraction in GDP coincided with the chancellor introducing his £81billion package of spending cuts, which includes hundreds of thousands of public-sector job losses.
Economists warned the fall in GDP output will have shaken confidence in the ability of the private sector to pick up the expected slack in the economy and hold off a double-dip recession – defined as two consecutive quarters of economic contraction.
Gareth Williams, head of policy at the Scottish Council for Development and Industry, said the more severe and prolonged cold weather north of the border meant the figures for Scotland were likely to be even worse.
“These figures reinforce our point that the forthcoming UK and Scottish budgets must be budgets for growth because it does not seem as though Westminster or Holyrood are currently prioritising the economy,” he said.
“Government must do all it can to support business growth and internationalisation, improve access to finance, sustain capital investment and address rising cost pressures, particularly fuel.”
Andy Willox, of the Scottish Federation of Small Businesses, said many of the problems would be felt more acutely north of the border.
He said a fuel price stabiliser would help Scottish businesses which are already paying higher transport costs, and called for more incentives for small firms to take on new staff.
“Small businesses created 79,000 jobs in Scotland over the last 10 years while 33,000 were haemorrhaged by big business,” he said.
“If the government is serious about stoking the economy, they have got to provide support for small businesses – it is them, not the public sector or big business, that is going to be creating jobs in the months and years to come.”
A spokesman for the Scottish Chambers of Commerce said: “There’s no doubt that the bad weather in December was a major factor. People weren’t able to get to the shops and problems with the postal service meant online shopping was pretty much wiped out. Even service stations were reporting business was down 10%.
“Undoubtedly the government’s austerity measures will also have an impact in the longer term. We are going to see cuts in public-sector employment over the next couple of years, and the slack will have to be taken up by the private sector. That means firms will need business support and measures to encourage growth, and that will come down to both the UK and Scottish Parliament.”
Mr Osborne said: “These are obviously disappointing numbers but the ONS has made it very clear the fall in GDP was driven by the terrible weather in December.
“There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis.”
Last week the ONS confirmed retail sales in the UK had the worst December on record. It also revealed the Consumer Prices Index (CPI) rate of inflation rose to 3.7% that month, pushed higher by rising food and fuel bills.