The U.K. economy contracted in the fourth quarter for the first time in a year and at a faster than expected pace, raising hopes of another round of quantitative easing from the central bank.
According to the preliminary estimates from the Office for National Statistics released Wednesday, gross domestic product dropped 0.2 percent sequentially, after expanding 0.6 percent in the third quarter. Economists had forecast GDP to fall 0.1 percent.
Whether the economy really entered a recession can be answered only when the first quarter GDP figures are out. Vicky Redwood, an economist at Capital Economics said the economy is back in recession and that it will continue to contract for most of this year.
IHS Global Insight's Chief U.K. Economist Howard Archer expects the recession to be modest and short-lived although much will depend on events in the Eurozone. He forecasts the economy to stabilize towards the middle of the year and then achieve modest growth in the second half.
Meanwhile, Ernst & Young ITEM Club has blamed political uncertainty in the Eurozone as the factor behind the halt in the U.K. recovery. The think tank sees a mere 0.2 percent expansion this year, before accelerating to 1.8 percent in 2013.
Only the industry breakdown of the GDP data is available now. Output of the production industries fell 1.2 percent in the fourth quarter, reversing the 0.2 percent increase in the previous quarter. Likewise, the decline in construction output came in at 0.5 percent, in contrast to last quarter's 0.3 percent growth.
At the same time, output of the service industries remained unchanged, following a rise of 0.7 percent in the previous quarter.
On a yearly basis, gross domestic product increased by 0.8 percent in the fourth quarter, in line with economists' expectations. For the whole of 2011, growth eased to 0.9 percent from 2.1 percent in 2010.
In a separate communique, the ONS said services output grew 1.6 percent in November from the previous year as three of the four service sector components marked increases. Month-on-month, services output rose 0.6 percent.
The International Monetary Fund forecasts 0.6 percent growth this year in the U.K. before advancing to 2 percent next year.
Yesterday, Bank of England Governor Mervyn King hinted at possibilities of more quantitative easing given the fact that inflation is slowing and economic activity is weakening. But he sees no reason to despair as all crises will come to an end.
by RTT Staff Writer
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