UK economy teeters on brink of recession

25 Jan 2012, 11:24 pm   -   Source: AAP
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Britain's economy shrank by more than expected in the fourth quarter, data shows, placing it dangerously close to recession.

Britain's economy shrank by more than expected in the fourth quarter, data showed Wednesday, placing it dangerously close to recession as activity was hit by the eurozone crisis and austerity measures.

Gross domestic product (GDP) dipped 0.2 per cent in the three months to December, the Office for National Statistics said in a statement.

The decline was driven by weakness in the production and construction sectors, and was worse than market expectations for a 0.1 per cent contraction.

Economists warn this is likely to be followed by a decline in the current first quarter of 2012, which would place Britain back in recession - defined by two successive quarters of contraction. First quarter data is due in April.

Despite the looming threat, British finance minister George Osborne insisted that his coalition government would stick to its harsh austerity program that has been blamed by political opponents for choking growth.

"Britain has substantial debts and if we don't deal with those debts our economic problems will be substantially worse," Osborne said, speaking a day after the IMF slashed its global economic forecasts due to the eurozone crisis.

"We've got to accept that Britain's economic problems - difficult as they are, built up as they have been over the last ten years - have been made worse by the situation in the eurozone, by the crisis on our doorstep."

The Conservative-Liberal Democrat coalition government has sought to slash public spending and raise taxes to correct a record deficit that it inherited from the previous Labour administration in 2010.

The opposition Labour party argues that the coalition is damaging the recovery with the rapid pace of its austerity measures.

Britain's unemployment rate stands at 8.4 per cent, the highest level for 17 years, following massive cuts to public sector jobs.

"By clobbering the economy with spending cuts and tax rises that go too far and too fast, the government has left us badly exposed if the eurozone crisis deepens this year," said Labour finance spokesman Ed Balls.

Bank of England (BoE) governor Mervyn King on Tuesday warned that Britain faces an "arduous, long and uneven" road to recovery, adding that the central bank could decide to pump out more cash to boost growth.

The BoE appears increasingly likely to increase its stimulus program after minutes from the bank's January meeting, published on Wednesday, referred to "substantial" risks to the economy.

The disappointing fourth-quarter growth data was meanwhile a major slowdown from the 0.6 per cent growth witnessed in the previous three months.

It marked the first contraction since the fourth quarter of 2010, when economic activity fell by 0.5 per cent as freezing weather across much of Britain hit output.

"Unfortunately, UK economic activity is likely to get worse before it gets better, with a technical recession likely to be confirmed by first-quarter 2012 GDP numbers," said ING economist James Knightley.

"Household spending is constrained by the fact that wages have failed to keep pace with the cost of living for four consecutive years while job insecurity is rising once again."

"At the same time, austerity measures mean government spending will contract and the eurozone sovereign debt crisis is hurting exports to the UK's largest trading partners."

Although Britain is not a member of the eurozone, it relies on the crisis-hit region for about 40 per cent of its trade.

The International Monetary Fund on Wednesday slashed its 2012 British growth estimate to just 0.6 per cent, compared with the prior forecast of 1.6 per cent expansion, and blamed "intensifying strains" in the eurozone.

The UK economy clawed its way out of a deep downturn in the third quarter of 2009, but has since struggled to stage a convincing recovery.

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