UK economy shrinks by 0.2%

We're not out of the woods yet. This morning's GDP figures from the ONS confirm that GDP contracted in the closing three months of last year.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

The Office for National Statistics showed a glimmer of economic hope last year when it revealed that the UK economy had actually grown by 0.6% in the third quarter of 2011. But these hopes have been dashed with the latest figures, a contraction proving that GDP still isn’t on firm footing.

The 0.2% fall isn’t the end of the world - hell, the ONS mooted the figure back in January and there's been no financial apocalyse in the interim - but it does suggest that Bank of England governor Mervyn King’s prediction was spot on: ‘there is likely to be a ‘zigzag’ pattern of alternating positive and negative quarterly growth rates,’ he warned in his February inflation report. ‘It will be harder than usual to interpret the official estimates of growth.’

The factors that effected the most influence over Q4 GDP were consumer spending, which rose by 0.5% - the first quarterly increase in over a year - and exports, which jumped 2.3%. But, pulling UK growth figures into the red were ‘gross fixed capital formation’ (investment in fixed assets – plant and machinery, say - as opposed to consumer spending), which dropped by 2.8%, and b2b investment, down 5.6% on the quarter. The production sector, including manufacturing, also fell 1.4% compared with previous forecasts of 1.2%.

That firms are cutting back on investment isn’t especially surprising: business confidence is at a low ebb with all the strife in the eurozone and financial turmoil at home. Just look at the swingeing job cuts announced by Centrica yesterday: 2,300 British Gas staff will find themselves out of work as the firm scrambles to save cash.

As a result, full-year growth for 2011 has been revised down to 0.7% from the earlier 0.9% estimate.

But will the decline continue into the first quarter of 2012? If it does, the UK risks falling into an official recession. However, there are a few saving graces. The latest PMI surveys hint at an economic recovery - the services sector grew at its fastest rate since March last year in January. Inflation has also been steadily falling. And, with the ink drying on the Greek bail-out, the eurozone could finally see some stability in the coming months. All good news for GDP.  Nevertheless, the onus will be on George Osborne to ensure that his Budget next month encourages business to start spending again, or risk another contraction…

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