Double-dip recession looms for UK

Osborne under pressure ahead of statistics expected to show output fell in final quarter.

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The Independent Online

The Chancellor George Osborne will face renewed scrutiny over his deficit-slashing strategy this week with official figures set to show that the country is on the verge of a double-dip recession.

Forecasters are pencilling in a 0.1 per cent dip in output between October and December, the first time the UK economy has shrunk for a year. If GDP falls again this quarter, the UK will have returned to recession.

The independent Office for Budget Responsibility predicts a decline of a similar magnitude and puts the chances of recession at one in three.

A decline in this week's Office for National Statistics figures would leave the Chancellor presiding over a spluttering economy which has failed to grow in three of the past five quarters (see graph). An extra bank holiday for the royal wedding and Japan's tsunami slowed the economy between April and June 2011. Heavy snow at the end of 2010 also sent the recovery into reverse as the economy shrank by 0.5 per cent.

Mr Osborne is likely to blame the lingering debt crisis in Europe for the latest slide which left the UK floundering nearly 4 per cent below its pre-recession peak of early 2008.

Britain's industrial sector is likely to have dragged down growth, partly due to lower demand for gas in a mild winter. But the much bigger services sector, which shrank by 0.7 per cent in October and accounts for around three quarters of the economy, is likely to have inflicted the most damage.

Simon Hayes, Barclays Capital's chief economist, said cuts were biting even before last summer's sovereign debt crisis which could still tip Europe's biggest nations back into recession. He said: "Fiscal austerity has had a huge cost in terms of demand in the economy throughout 2011. The recovery was also weak relative to other nations before the crisis hit."

There was some cheer last week, when the Bank of England confirmed that November marked the biggest fall in inflation for more than three years.