Double-dip recession fears as UK economy shrinks 0.2 per cent

The UK was staring down the barrel of another recession today after the economy shrank more than expected at the end of last year.

Declines in the manufacturing and construction sectors drove a 0.2% fall in GDP in the final quarter of 2011, according to an initial estimate by the Office for National Statistics (ONS).

The performance was described by Prime Minister David Cameron as disappointing, while Chancellor George Osborne pledged to stick to the coalition government's austerity programme, which has been attacked for choking off the recovery.

Mr Osborne insisted: "Britain has substantial debts. If we don't deal with those debts, our problems will be worse."

However, TUC general secretary Brendan Barber warned that unless the Government started focusing on jobs and growth, it could preside over a decade of economic stagnation.

He said: "The Chancellor's economic strategy is going horribly wrong.

"The grand austerity plan is failing to tackle the deficit, causing unemployment to spiral out of control, and is now dragging the country back towards recession."

With the eurozone weighing on global growth prospects, economists predict further GDP declines for the first half of 2012, raising the prospect of another recession - two successive quarters of contraction.

But most experts think the latest downturn will be mild compared with the slump of 2008/09, when output dropped by more than 7%.

Graeme Leach, chief economist at the Institute of Directors, said: "We've taken one step towards a double-dip recession, and it's now probably 50-50 as to whether we'll take the second.

"But even if output does increase in the current quarter, we'll continue to experience the feel-bad jobless recovery for some time yet."

The figures marked the first contraction in the economy since the final quarter of 2010, when Arctic weather caused mayhem, and is also a drastic deterioration on the 0.6% growth seen in the previous quarter.

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

The fall in the final quarter, which was worse than City expectations of a decline of 0.1%, was partly caused by a 0.9% contraction in manufacturing as weak consumer spending depressed demand in the UK, while the eurozone debt crisis hit exports.

The sector's reverse is a blow to Mr Osborne who had hoped it would spearhead the UK's recovery by driving exports.

And a separate survey by business body CBI suggested the sector's woes had continued into 2012 after both domestic and export orders fell in January.

Although a modest rise in export orders is expected in coming months, the industry remains "fragile", it warned.

The construction sector also suffered a 0.5% fall in the wake of the Government's austerity cuts, while mild winter weather contributed to a 4.1% fall in the gas and electricity sectors as households turned the heating down.

And a public sector strike on November 30 caused nearly a million working days to be lost but its effect was likely to have been small.

Meanwhile, the powerhouse services sector, which accounts for three-quarters of the economy, saw growth grind to a halt as consumers, who have suffered the longest attack on their spending power since the 1920s, reined in spending.

As a result, the part of the services sector that includes retailers, hotels and restaurants suffered 0.5% decline despite stores putting on a frenzy of pre-Christmas special offers in an attempt to drum up trade.

The gloomy fourth quarter figures came a day after Bank of England governor Sir Mervyn King warned that the UK faced an "arduous, long and uneven" road to recovery and said weaker inflation meant there was more scope for further emergency money printing.

Minutes from this month's 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 were resolved.

Andrew Sissons, a researcher at The Work Foundation, said the health of the manufacturing sector was key to the UK's recovery.

He said: "Without a recovery in exports and manufacturing it is hard to see how the economy can escape its trajectory of low growth in the short-term.

"The Government must focus on restoring confidence to business and boosting exports in the year ahead - this must start with a coherent and substantial growth plan in the Chancellor's Budget in March."

PA