Double-dip looms as slump hits economy

Manufacturing's worst quarter since early 2009 renews fears of a return to recession

Flagging manufacturers wreaked havoc with the economy during the final quarter of 2011 as the worst slump for nearly three years put Britain on course for a double-dip recession, official estimates revealed yesterday.

Manufacturing, which accounts for about 10 per cent of output, fell 0.9 per cent between October and December as the overall economy shrank by a worse-than-feared 0.2 per cent, the Office for National Statistics (ONS) said.

With UK's powerhouse services sector also grinding to a halt, the worst quarter for manufacturers since the beginning of 2009 was enough to drag the wider economy into the red as firms felt the bite of falling demand at home and turmoil in Europe hit exports.

Another slide in the current quarter would put the UK officially in a double-dip recession and deal a huge blow to the credibility of the Chancellor's deficit-cutting strategy.

Lee Hopley, chief economist at the EEF manufacturers' organisation, said: "Clearly the turbulence in manufacturers' major markets in Europe has gone past depressing only sentiment and is now holding back production."

The milder start to the winter also hit wider industrial production as households kept the heating off, leading to lower gas demand, the ONS said. Construction also sapped growth, falling 0.5 per cent over the quarter.

Despite the manufacturing weakness shown by the official estimates, the CBI's latest survey fuelled hopes that the sector could stem the decline as firms signalled expectations of a slight rise in exports and modest growth during the next three months.

Director-general John Cridland said there were "tentative" signs of improvement but warned: "We know that 2012 will be not be an easy year. The watchword continues to be uncertainty."

The latest figures position the economy still 3.8 per cent below its pre-recession peak, leaving Britain lagging behind all developed nations except Japan and Italy in the recovery stakes.

The lingering concern over UK prospects leaves the Bank of England odds-on for another burst of quantitative easing (QE) to pump cash into the economy. Rate-setters voted unanimously to hold fire on further action this month after signs of improvement from the US and easing funding pressure on European banks, but there were hints of a split over how much more money the Bank could print.

Minutes of the January meeting revealed some members of the Bank's Monetary Policy Committee (MPC) pushing for a further expansion of QE, with other rate-setters more worried over "finely balanced" inflation risks.

Barclays Capital's chief economist Simon Hayes said: "The decision in February therefore seems less clear-cut than it did previously. We still expect more asset purchases to be announced – the MPC's central projection for inflation is unlikely to have changed very much – but the committee may act less aggressively than previously expected and there is every chance that additional asset purchases will not garner unanimous support."

The Bank expects the economy to be "broadly flat" for the first half of 2012, before picking up towards the end of the year as inflation falls back.

But the International Monetary Fund yesterday slashed back its forecasts for the UK, predicting that the economy will grow by just 0.6 per cent this year. This is worse than the 0.7 per cent pencilled in by the independent Office for Budget Responsibility.