Recession Looms As UK Economy Shrinks By 0.2%

January 25th, 201211:10 am @


Recession Looms As UK Economy Shrinks By 0.2%

The UK economy shrank by 0.2% in the last three months of 2011, official GDP figures have revealed.

It is the first quarter of negative growth for a year and the fall was slightly more than expected.

The contraction marks a sharp slowdown on the 0.6% rise in the previous three months of 2011, fuelling fears of a double dip recession.

If this figure is not revised upwards and there is another contraction in the first quarter of 2012, the UK will be plunged back into recession.

Negative growth in the final three months of last year 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.

Output in the service industry remained flat and government contracts were up by 0.4%.

GDP over the whole of 2011 grew by 0.9%, compared with growth of 2.1% in 2012.

Continuing problems in the eurozone have been significantly hampering growth.

The fourth-quarter decline opens Chancellor George Osborne up to fresh criticism that his austerity measures are choking off the economy.

Unemployment also recently hit a 17-year high.

But Mr Osborne insisted he would stick to his plans.

He added: “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 ten 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.”

Wednesday’s figures reinforce expectations that the Bank of England will inject more cash into the economy next month in an attempt to stimulate growth.

The central bank’s governor, Sir Mervyn King, said yesterday that the UK faced an “arduous, long and uneven” road to recovery.

Mr King has so far resisted calls for another round of quantitative easing but negative growth will intensify the pressure.

James Knightley, an economist at ING Bank, said today’s GDP figures pointed to further economic gloom.

“Unfortunately, UK economic activity is likely to get worse before it gets better with a technical recession likely to be confirmed by GDP numbers for the first quarter of 2012.

“With such economic uncertainty, firms are reluctant to invest and hire so it is difficult to see where any growth will come from in the next couple of quarters.”

But he said he is more optimistic about the second half of 2012, when falling inflation will help ease the squeeze on consumers’ spending power, which has been behind much of the recent weakness in the economy.

Bank Of England

Pressure on the BoE for another round of quantitative easing is increasing


The GDP figures came a day after other official figures from the Office for National Statistics showed that UK debt surpassed the £1trn barrier for the first time.

The International Monetary Fund has also downgraded its global outlook for growth.

The IMF’s forecast for UK growth this year was cut by 1% to 0.6% – although Britain is still expected to outperform Germany and France.

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