UK limps out of recession - for now

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The UK's fragile economy has limped out of recession - but its weak performance today fuelled fears of a further slump.

The tentative 0.1 per cent growth in the final quarter of 2009 ended the UK's longest and deepest decline on record, according to Office for National Statistics first estimates.

But it fell far short of expert forecasts of a 0.4 per cent rise and prompted a political storm as Chancellor Alistair Darling defended his growth predictions for the year, while opposition parties questioned his handling of the economy.

Last year, output slumped 4.8 per cent - the biggest annual drop since 1949 - while the economy has contracted 6 per cent since the recession began in the second quarter of 2008.

The UK is the last of the G7 nations to technically pull out of decline, although the fragile nature of the recovery will heighten fears of a "double-dip" recession with spending cuts and tax hikes looming after the next general election.

Today's figures coincide with fresh forecasts from the International Monetary Fund, predicting the UK will expand 1.3 per cent this year, compared with growth of 2.7 per cent in the US, 1.5 per cent in Germany and 1.4 per cent in France.

Economists had hoped for a much stronger upturn in the ONS figures after survey data had pointed to an increase for both manufacturing and services firms, while the first fall in unemployment for 18 months has also suggested a return to growth.

But the UK's powerhouse services sector - which accounts for more than two-thirds of the economy - only managed 0.1 per cent growth in the fourth quarter, the ONS said.

Experts added that the largest contribution to growth came from areas such as retail and the motor trade, which have been helped by temporary factors such as the Government's cash-for-bangers car scrappage scheme and the planned January rise in VAT.

Daiwa Capital Markets economist Colin Ellis said without these, the economy "stagnated at best".

"Never has an end to a recession been so underwhelming," he added.

The pound dipped against the dollar and euro after the estimate was released as traders bet interest rates would have to be kept at record lows for longer to help power the UK recovery.

Mark O'Sullivan, director of dealing at Currencies Direct, said the ONS figures were a "major blow" to sterling and to hopes of a decisive recovery.

"While we should be celebrating the fact that the UK is finally out of a recession, attention will be drawn to the Bank of England's next move," he said.

"It's sure to say that the UK will face a long, tepid recovery that will require a continuation of the loose monetary policy from the Bank of England, to prevent a double-dip recession."

Mr Darling said the ONS results vindicated his prediction of growth before the end of 2009 and said a rise was always going to be "moderate".

He predicts growth of between 1 per cent and 1.5 per cent this year.

"There are many bumps along the way, we are not out of the woods yet, so I think my caution is right," he told BBC Radio 4's The World At One.

Shadow chancellor George Osborne said the figure was "about as weak growth as you can get" and told the BBC that the economy was "badly prepared for recovery".

The strength of the recovery is likely to prove political hot property in the run-up to the general election.

Public borrowing has ballooned to an estimated £178 billion in the current financial year and the parties are already at loggerheads over methods of nursing the economy back to health.

Today's ONS estimate is based on just 40 per cent of the relevant data, leaving the measure vulnerable to revisions in either direction when the ONS publish their next estimate in February.

Jonathan Loynes, chief European economist at Capital Economics, said the ONS estimates were a disappointment and showed that recovery was at a "snail's pace".

"No doubt some commentators will claim that the figures are under-estimating the true strength of the recovery and will be revised up in time," he said.

"That is certainly possible. But from such a low starting point, it will take some very big changes to make much of a difference."