Instant View - Q4 GDP unexpectedly revised down 0.6 percent

LONDON (Reuters) - The economy contracted even faster than previously estimated in the last three months of 2010, shrinking by 0.6 percent after downward revisions to

industrial and services output, official data showed on Friday.

The figures may make Bank of England policymakers wary of raising interest rates, although there have been signs that activity picked up at the start of this year following December's snow-related disruption.

ANALYST COMMENT

JAMES KNIGHTLEY, ING

"The detail shows that government spending was the only positive growth driver. 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.

"Certainly the bad weather played its part and we should get a bounceback in the first quarter. However, the ONS has already stated that stripping out bad weather activity was fairly flat in the fourth quarter, so we shouldn't overstate the case for a large weather effect rebound.

"Furthermore, yesterday's CBI retail sales data suggests that after January's surge, retailers saw less spending in the shops in February while the overnight GfK consumer confidence index remains at levels consistent with a sharp drop in spending.

"Next week's February purchasing managers' indices will be key and any disappointment there will further dent rate hike expectations. We remain less optimistic than most on the growth story for 2011 and 2012 and therefore believe that the pricing in of 100 basis points of rate hikes over the next twelve months is overdone."

VICKY REDWOOD, CAPITAL ECONOMICS

"The slight downward revision to UK GDP in Q4 might give the more hawkishly inclined members of the MPC reason to pause for thought.

"The recent MPC minutes had flagged the possibility that the data would be revised up, but in fact the drop in GDP was revised from 0.5 percent to a bigger 0.6 percent.

"And 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.

"Indeed, the other economic news of late has not been very reassuring -- including the weak consumer confidence figures released overnight. We still think that the economic recovery will struggle this year and expect growth of just 1.5 percent or so."

AMIT KARA, UBS

"It's something of a surprise that the data was revised down a little bit. But I don't think today's revision is likely to have a major impact on the monetary policy outlook.

"As far as the MPC is concerned it's the size of the bounce-back and the endurance of any recovery which will determine the path of monetary policy. In our judgement, the committee will begin a rate hiking cycle from May... They'd want to see what's happening in the March and April PMIs."

STEPHEN LEWIS, MONUMENT SECURITIES

"There's a disappointing performance by service industries which is contributing to the downward revision in the GDP growth and this is probably in part weather-related but it doesn't seem to be wholly attributable to the snowy conditions.

"Consequently one has to worry that service industries will continue to perform poorly in the current quarter and this will damp down expectations for GDP growth this year."

"I think that it will strengthen the conviction of those who think that they should wait before pulling the trigger on rates."

RICHARD BARWELL, RBS

"Numbers speak for themselves. We didn't think there would be a massive upwards revision this month.

"Given that the ONS ploughed so much extra resource into the first number it seemed unlikely to us that the number would move up a lot. We had enough production data pointing this way too.

"Not a great surprise but I guess the main bit of information here is around whether you think there is a possibility of a rate rise in March. I think this further diminishes the chance of that.

"I think May is still on the cards. This is one bad quarter, and we think it will come back in Q1. We think the committee is convinced of the need of at least one or two hikes at this stage, so I think May is still on the cards, but I think this really pushes back the odds of March quite significantly."