Economy shrinks by unexpected 0.3%

Jan 25 2013

Britain's recovery slammed into reverse at the end of last year after the economy contracted by a worse-than-expected 0.3%, official figures have revealed.

The fall in gross domestic product (GDP) between October and December compares with 0.9% growth in the third quarter and will raise fears that the UK is on course for an unprecedented triple-dip recession.

GDP - a broad measure for the total economy - would have to contract again this quarter for the UK to be back in recession, but hopes of a rebound are starting to fade after a snow-hit start to 2013.

The Office for National Statistics (ONS) said economic output as a whole remained flat in 2012.

The fourth-quarter drop is worse than expected, with most economists forecasting a drop of 0.1%. It deals a blow to recovery hopes after the UK bounced back from the longest double-dip recession since the 1950s in the third quarter.

But the rebound was largely driven by one-off factors, such as the Olympics, and as the economy clawed back activity lost during the Queen's Diamond Jubilee holiday, which has skewed quarter-on-quarter changes in activity, the ONS said.

The fourth-quarter figures are preliminary estimates and subject to revision. The latest ONS estimate increases the pressure on Chancellor George Osborne at a time when all three major ratings agencies have the country's prized AAA status on negative outlook.

A Treasury spokesman said: "The official forecast was that the UK economy would contract in the last quarter of 2012 so this figure is not unexpected. It confirms what we already knew - that Britain, like many European countries, still faces a very difficult economic situation."

The ONS said the UK had recovered only half of the fall in GDP seen since the start of the 2008 recession, with output still 3.3% lower than its pre-recession level.

Bank of England governor Sir Mervyn King said earlier this week that the UK had been slower to recover than most other countries. The biggest drag on GDP came from the production and manufacturing sector, which saw output fall 1.8% quarter-on-quarter, according to the ONS. But Sir Mervyn insisted earlier this week that there were signs of a "gentle recovery" under way.