UK economy shrinks by 0.2% in last three months of 2011

UK economic activity shrank by 0.2% in the last three months of last year according to official figures.

It marks a sharp drop in economic activity from the third quarter of 2011, when gross domestic product (GDP) expanded by 0.6%.

The figures, from the Office for National Statistics (ONS), are a preliminary estimate, which could be revised either up or down by 0.2%.

The ONS figures also show that the economy grew by 0.9% during 2011.

'Eurozone situation'

The gain for the year is in line with official targets.

The Chancellor, George Osborne, said the figures were disappointing but not a surprise.

"They are not entirely unexpected because of what's happening in the world and what's happening in the eurozone crisis," he said.

"The truth is that dealing with those problems is made more difficult by the situation in the eurozone."

Ed Balls MP, Labour's shadow chancellor, said the fall in GDP was linked to the government's cuts in public spending, which was curbing domestic demand: "The British recovery has been stalling since the government's spending review in the autumn of 2010, but now the economy has gone into reverse.

"By clobbering the economy with spending cuts and tax rises that go too far and too fast, the government has left us badly exposed if the eurozone crisis deepens this year."

Worse than feared

The quarterly fall in GDP is the first since the last three months of 2010, when freezing weather was blamed for a 0.5% drop.

The new figure was worse than had been feared, as most economists had pencilled in a 0.1% fall in activity.

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 construction sector.

Meanwhile, the services sector, which accounts for two-thirds of the economy, ground to a halt.

November's public sector strikes, which took place in the fourth quarter period, losing nearly a million working days, may also have held the economy back.

The new figures come a day after the governor of the Bank of England, Sir Mervyn King, said that the UK faces an arduous path to economic recovery.

On Tuesday the International Monetary Fund also cut the growth forecast for the UK economy in 2012 to 0.6% from 1.6%.

'Feel-bad'

But Chris Williamson, the chief economist at Markit, said that the downturn was unlikely to last long.

"While the UK clearly faces a clear risk of sliding back into another recession, which is commonly defined as two consecutive quarter of declining GDP, there are growing indications that any downturn is likely to be mild and short-lived," he said.

He added, however, that the eurozone was the swing factor, with a further escalation of the crisis likely to the single biggest threat to the UK economy, while an improvement in the euro area could lead to a revival of both business and consumer confidence.

A survey on industrial trends by business body the CBI, found that both domestic and export orders fell in January for the first time in two years, while production weakened sharply over the past three months.

Its chief economic adviser Ian McCafferty warned: "While the acute fears seen at the end of last year over global demand may be subsiding, 2012 will prove to be a difficult year for UK manufacturing, as the crisis in the eurozone - our biggest export market - has yet to reach any definitive resolution."

Graeme Leach, the chief economist at the Institute of Directors, said: "The tightrope walk between recession and recovery continues. 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, with a fall in output this quarter as well.

"It's important to stress that the 0.2% fall in GDP is not large and could be reversed as QE2 works through the economy.

"But even if output does increase in Q1, we'll continue to experience the feel-bad jobless recovery for some time yet. Indeed, the combination of falling output and today's MPC minutes suggest QE2 could be further expanded in February. "

The Federation of Small Business' national chairman, John Walker, agreed the economy would limp on for some time.

"The fall in GDP confirms the ongoing fragile nature of the economy," he said.

"The figure is in line with a recent FSB survey which showed that confidence among small businesses plummeted in Q4, recording a score of -24.5, a fall of some 15 points from the previous quarter."