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Business News

Economy contracts by 0.2 per cent


The UK's economy contracted 0.2% in the final quarter of 2011, revised figures confirmed today, while growth for the year as a whole was lower than previously thought.

Final quarter gross domestic product was left unchanged in the Office for National Statistics' (ONS) second estimate, despite consumer spending returning togrowth for the first time in a year and a half as retailers slashed prices.

The fall in GDP was largely driven by the biggest drop in business investment for a year, while the production sector, which includes manufacturing, declined 1.4% compared with previous estimates of 1.2%. The construction sector contracted and the powerhouse services sector was flat.

But the UK's GDP growth for 2011 as a whole was revised down to 0.8% from 0.9% in its previous estimate after growth in the first and third quarters was weaker than previously thought.

The figures will add to fears that the UK could head back into recession - defined as two successive quarters of GDP falls.

Economists are currently unsure about whether the UK's economy will continue to deteriorate in the first quarter of 2012, after encouraging industry surveys in recent months.

Chris Williamson, chief economist at Markit, said: "A return to growth in the first quarter is by no means guaranteed, and the country clearly faces a significant risk of sliding back into another recession.

"But the economic environment both at home and abroad has certainly improved from the all-pervading gloom that seemed to preside late last year.

"Unless the eurozone debt crisis escalates, the coming year is therefore likely to see modest growth. However, there will no doubt be high volatility in the GDP numbers due to factors such as the Olympics and additional bank holiday for the Queen's Jubilee."

Bank of England Governor Sir Mervyn King recently said the UK economy will "zig-zag" this year but is heading in the right direction.

The figures from the ONS showed that household consumption rose 0.5% despite pay continuing to fall by 0.3% when the effects of inflation are included.

But despite the rise in the final quarter, consumer spending fell by 0.8% for 2011 as a whole.

The fall in industrial production was worse than previously thought, with electricity and gas supply falling by 5.1% as the mild autumn weather caused households to turn down their central heating.

The manufacturing sector declined by 0.8% in the quarter, which was slightly better than previous estimates.

However, rising exports made their biggest contribution to the economy for a year, boosting Chancellor George Osborne's plans for the UK to make more and export less. The UK's trade deficit decreased to £2.5 billion in the final quarter, down from £4.4 billion in the previous three months.

Shadow chancellor Ed Balls said: "With our stalled economy now in reverse, unemployment soaring, and £158 billion extra borrowing to pay for this economic failure, the case for a change of course and a real plan for jobs and growth in next month's Budget is growing by the day.

"These revised figures show that the economy grew even less than we thought in 2011. Since George Osborne's spending review, the economy has grown by just 0.2% compared to the 3.0% the Government predicted. And far from the eurozone crisis being to blame, only rising exports kept us out of recession last year.

"For the sake of hard-pressed families, pensioners, young people and businesses, George Osborne needs to listen and use next month's Budget to change course. It's his last chance to make a difference to our economic prospects this year and next."