UK economy in shock contraction

(SHARECAST) - Britain's economy shrank in the fourth quarter of 2010, surprising analysts who had only been expecting a slight slowdown from the solid growth seen the previous three months.

Gross domestic product contracted by 0.5 percent between October and December, according to figures released by the Office for National Statistics (ONS). The latest figures are a shock given that analysts had been expecting growth of about 0.2 percent to 0.6 percent.

Weakness in the construction and services sectors were responsible for the surprise fall. Activity in the construction sector, which was hit hard by the extreme winter weather in December, contracted by 3.3 percent. Services, Britain's biggest sector, saw a 0.5 percent contraction.

Output in the production industries, which includes manufacturing, increased by 0.9 percent, the ONS said.

The latest data is a major blow for the UK economy and a big headache for the government.

The housing market remains weak and unemployment is still a problem, but inflation is also an increasingly important issue. While rising prices have been adding to pressure on the Bank of England to raise interest rates, today's GDP data will be seized on by those in favour of keeping rates at 0.5 percent.