Economy: UK on brink of recession after 0.2% fall in GDP during final quarter of 2011

THE UK’s economy suffered a worse-than-expected 0.2% contraction in the final quarter of 2011, it was revealed today, fuelling fears of another recession.

The Office for National Statistics’ initial estimate for the period marks the first time the UK’s gross domestic product (GDP) has fallen since the final quarter of 2010 when the Arctic weather was blamed for a 0.5% drop. The City had expected a decline of 0.1%.

The contraction was driven by a 0.9% fall in manufacturing, a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5% fall in the construction sector, while the powerhouse services sector ground to a halt.

There is also likely to have been a small impact from the public sector strikes on November 30, when nearly a million working days were lost.

The disappointing fourth-quarter performance represents a strong slowdown on the 0.6% growth in the previous quarter.

Over the course of 2011 as a whole, GDP increased by just 0.9%, much slower than the 2.1% growth in 2010.

It will fuel fears that the UK’s economy is heading for a recession, officially defined as two quarters in a row of GDP declines, with economists widely expecting further falls in the first quarter of this year as the economy struggles under the austerity measures and the eurozone debt crisis.

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Today’s figures will leave Chancellor George Osborne open to further criticism from Labour and the unions that his austerity measures are choking off the economy.

The decline in manufacturing will come as a particular blow because the sector was central to the Government’s plans to rebalance the economy by exporting more and importing less.

It comes as Bank of England governor Sir Mervyn King warned last night that the UK’s economy faces an “arduous, long and uneven” road to recovery and said falling inflation meant there was more scope for further emergency money printing.

However, the recession is expected to be mild compared with the slump of 2008/09, when output dropped by more than 7%.

James Knightley, an economist at ING Markets, said UK economic activity was likely to get worse before it gets better but added: “That said, we are more optimistic on the second half, given tax changes will put an extra �1billion in the pockets of low and middle-income earners while compensation payments from the mis-selling of payment protection insurance will also help.

“Key will also be the sharp drop in inflation, which could finally allow real incomes to turn positive in late 2012.”

Today’s figures mean the Bank of England is increasingly likely to inject billions of pounds more into the UK economy through quantitative easing in February, after declining to do so earlier this month.

Minutes from that meeting showed the Bank’s Monetary Policy Committee found that “substantial” risks to the UK economy remained and it would be some time before uncertainties surrounding the risks are resolved.

These uncertainties included how strongly UK output growth would recover in the second half of 2012 and whether euro-area governments would be able to tackle their debts and balance their economies.

Mr Osborne said: “These are disappointing figures about what happened to the economy at the end of last year, but they are not entirely unexpected because of what’s happening in the world and what’s happening in the eurozone crisis.

“And they are similar to what our independent forecaster predicted in November. Now Britain has substantial economic problems, debt built up over the past 10 years, and we are dealing with those, but the truth is that dealing with those problems is made more difficult by the situation in the eurozone.”

The International Monetary Fund downgraded its growth forecast for the UK economy yesterday, saying it now expected GDP to increase just 0.6% in 2012, compared to its previous estimate of 1.6%, as “intensifying strains” in the eurozone drag on the rest of the world.

But such is the depth of the eurozone crisis that the UK is still set to outperform its struggling rivals, with Germany set to grow by just 0.3% and France by 0.2%.