Britain 'in recession' as recovery falters

OECD says economy has shrunk for second successive quarter, but Osborne disputes report

Britain is back in recession, according to the latest unwelcome forecast from the Organisation for Economic Co-operation and Development.

The UK economy shrank at an annual rate of 1.2 per cent in the final three months of 2011 and will contract by 0.4 per cent in the first quarter of this year, it said. Two successive quarters of economic contraction is the technical definition of a recession.

Some ministers are also privately concerned that the problems afflicting the eurozone could still return with a vengeance. "There is a lot of concern about Italy and Spain," said one senior government source. Banks in both countries are taking advantage of the European Central Bank's injection of funds, but there are fears that this may not be enough to head off a crisis. "They are just entering recession from a period of very low growth, not after a boom, which is dangerous," the source added. Ministers are also worried that the threatened UK tanker drivers' strike could disrupt the recovery.

If the OECD is correct, the UK will be in its second slump in three years. The forecast of a "double-dip" recession follows a downward revision on Wednesday by the Office for National Statistics of economic activity between October and December last year. The ONS said the domestic economy shrank by 0.3 per cent, rather than the 0.2 per cent estimated in February. The ONS is due to make its preliminary estimate of GDP growth for the first three months of 2012 on 25 April.

In response to the OECD forecast, the Chancellor, George Osborne, pointed out that his own fiscal watchdog, the Office for Budget Responsibility, has pencilled in growth of 0.3 per cent for the first three months of 2012. "Our own forecast from our own independent body, which we published last week, says we are going to avoid a recession," he said. "We will see what the data shows over the next few weeks, but there's been some more encouraging economic signs in recent months."

Most City economists believe that the OECD is being overly pessimistic. The consensus view is that the UK economy will be shown to have grown modestly between January and March. Andrew Goodwin, a senior economic adviser to the Ernst and Young Item Club, said most surveys of business activity since the new year had been encouraging.

"The data appears to be consistent with GDP growth of 0.3 to 0.4 per cent in the first quarter, a long way from the recession forecast by the OECD," he said. "Output would have needed to have fallen significantly in February and March for there to be any chance of another negative quarter." Yesterday's ONS estimate of the January output of the UK's services sector – which makes up 70 per cent of GDP – showed a modest rise, consistent with a small amount of growth.

The shadow Chancellor, Ed Balls, also agreed there would probably be an expansion this quarter. But he warned that this should not be seen as a sign the economy is in decent health, or a vindication of Mr Osborne's fiscal policy. "A double-dip recession can and should be avoided. But after 15 months of zero growth under George Osborne, simply avoiding a technical recession is not good news for our economy," he said.

Even if Britain manages to avoid a return to recession, the outlook for the rest of the year remains deeply uncertain. The Governor of the Bank of England, appearing before a House of Lords committee this week, suggested that the economy might shrink in the second quarter of the year thanks to the extra bank holiday in June for the Diamond Jubilee.

But there are other signs of underlying weakness. A host of figures released yesterday by the Bank of England showed that the British public is still in the midst of credit squeeze.

The Bank of England and the OBR are both forecasting a return to reasonably robust growth by the end of this year. The OBR expects total growth over 2012 to be 0.8 per cent, rising to 2 per cent in 2013. The Bank of England has pencilled in 1.25 per cent growth for 2012, hitting 2.75 per cent in 2013.

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