Growth downgrade fuels new fears of a double dip

The economy shrank by more than expected in the final three months of 2011, heightening fears that the UK is returning to recession. There was a 0.3 per cent contraction between October and December, according to the Office for National Statistics, a worse figure than the statistics agency's previous estimate of a 0.2 per cent fall in output.

The downward revision came after statisticians identified a greater-than-expected decline in the output of the transport, communications and business services sectors. Financial services also dragged down the figure. The statistics also pointed to an intensifying squeeze on the finances of British households, with real disposable income falling by 0.2 per cent over the three months, and by 1.2 per cent over the year as a whole.

"The weakness highlighted in this release, in combination with the poor production and retail sales data so far, make it more likely than not that the economy also contracted in the first three months of this year, which would put the UK in a technical recession," said Azad Zangana, a European economist at Schroders.

The ONS release also changed its estimates for growth over the preceding nine months of 2011. In the first quarter of the year economic growth was revised down to 0.2 per cent and in the second quarter it was revised down to indicate a contraction of 0.1 per cent. Growth in the third quarter was revised up to 0.6 per cent.

The result of all these changes is that the ONS now believes total growth over 2011 was 0.7 per cent, down from its previous estimate of 0.8 per cent.

The ONS's preliminary estimate of GDP for the first quarter of 2012 – which will be published on 25 April – is likely to be closely watched. If that figure is negative, the UK will officially be back in its second recession in just three years. However, most analysts, encouraged by strong data from business surveys since the New Year, are predicting that the economy will turn out to have returned to modest growth in the first three months of this year.