MSE News

Economy shrinks by 0.2%

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' first estimate for the figure 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 30 November, 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 mild 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 austerity measures and the eurozone debt crisis.

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.

Memories of 2008

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, says UK economic activity is likely to get worse before it gets better.

He adds: "That said, we are more optimistic on the second half, given tax changes will put an extra £1 billion 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.”

Chancellor George Osborne says: "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."

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