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6388.73 -30 0.47% 04:35

‘Triple dip’ alert as UK economy contracts again

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‘Triple dip’ alert as UK economy contracts again

The UK economy contracted again in the final quarter of 2012, with a 0.3% decline in GDP defying even the gloomiest of forecasts and raising fears of a return to a full-blown recession.

The 0.3% decline in GDP, dragged down by a particularly weak production sector, comes after a brief respite in the third quarter when the economy rose out of recession to expand by 0.9%.

Two consecutive quarters of negative growth are needed to meet the official definition of recession, and January’s heavy snow could further weigh on the economy, dragging the first quarter GDP lower.

However, reports on UK GDP are often revised up as more data becomes available to the Office for National Statistics. Today’s is the preliminary reading, which only reflects around 44% of the total data that will become available for final estimates.

'Seasonal adjustment problems, working day effects, the Olympic effect and underlying poor data quality make this an incredibly volatile report,' commented ING economist James Knightley, who said he was 'hopeful of a gradual improvement through 2013'.

What economists and investors are saying:

Azad Zangana, Schroders: ‘Now that a negative GDP figure has been recorded, there is a significant risk that the UK economy suffers a triple-dip recession. Weak underlying economic activity coupled with the disruption of recent poor weather could cause GDP to fall in the first quarter of 2013.’ 

Howard Archer, IHS Global Insight: ‘It must be noted that the sharper-than-expected drop in GDP in the fourth quarter was influenced significantly by a record drop in mining and quarrying output which was due to repair work on a major North Sea oilfield... There was also undoubtedly some payback in the fourth quarter from the Olympics-lifted GDP spike of 0.9% quarter-on-quarter in the third quarter.’

Trevor Greetham, Fidelity Worldwide Investment: 'The more time that passes the clearer it is that America's gradual and delayed approach to fiscal tightening is the right one. As the IMF belatedly concedes, it is far easier to balance the books when an economy is growing.'

Ross Walker, Royal Bank of Scotland: ''To be clear, the UK economy is in a fragile state and underlying output trends are broadly flat this is not a 'good' number in any absolute sense. But markets and policymakers need to look beyond the headline GDP estimate.'

Chris Williamson, Markit: ‘The question is whether the smaller manufacturing sector can help drive a return to growth in the wider economy, or whether weak domestic consumer and business confidence will mean a downturn in services and retail offset any expansion of the goods-producing sector.’

Mark Littlewood, Institute of Economic Affairs: 'George Osborne's Plan A of spending £600 billion more over this Parliament than he brings in in tax revenue is, unsurprisingly, failing to yield results.’

Nonetheless, the weak report raises the pressure on chancellor George Osborne to re-think his austerity programme, coming after International Monetary Fund chief economist Olivier Blanchard this week told BBC Radio 4’s Today Programme that now ‘would be a good time to take stock’.

Chris Williamson, economist at data company Markit, said the report banged 'another nail in the coffin of the UK's AAA credit rating'.

It will also renew questions about whether the Bank of England should re-boot its quantitative easing aid programme, having already spent £375 billion to stimulate the economy. While the UK economy is weak, global growth is improving. Inflation remains above target at 2.7%, and expected to move slightly higher in the coming months, while the Bank’s Funding for Lending scheme is starting to show results.

GDP and main components (source: ONS)

Before today’s figures were released, forecasters on average had expected the UK economy to have contracted by 0.1% in 2012, ‘zig-zagging’ as had been predicted by Bank of England governor Mervyn King.

This year, the economy is expected to improve with economists on average pencilling in growth of 1% as the global economy slowly heals.

The pound weakened on the news, dropping back to $1.5760 after initial strength this morning. The FTSE 100 was little moved, higher on the day at 6,271.

'This will do little to reverse what’s becoming a very negative outlook for the UK and the pound,' said Andy Scott of foreign exchange brokers HiFX.

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