Market view: UK economy will ‘continue to contract’ in 2012

According to the first estimate of fourth quarter GDP published by Office for National Statistics today (25 January), the UK economy contracted by 0.2 per cent in the final three months of 2011.

Although a contraction was widely anticipated, the data confirm fears that economic growth has stalled and have prompted renewed concern over the likelihood of a double-dip recession. Both industrial production and construction output fell, while services output only managed to stagnate.

Think-tank Capital Economics said that its “bet” was that the UK is already back in a recession that will be confirmed when Q1 2012 GDP figures are published, and that “the economy will continue to contract for most of this year.”

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Vicky Redwood, the organisation’s chief UK economist, pointed out that January’s Monetary Policy Committee minutes suggest that the Committee remains split on whether further asset purchases are needed, with some members still not convinced that inflation will fall below the target in the medium-term.

Ms Redwood said: “However, there were clear signs that at least some will vote for more QE next month. For these members the risks of undershooting the target meant that a further expansion of asset purchases was likely be required.

Mervyn King’s speech last night suggests that he is in this camp. Indeed, we expect another £75bn of QE to be announced next month.”

Scott Corfe, senior economist at the Centre for Economics and Business Research, said that he also believed today’s data suggests that the UK is probably in the midst of a double-dip recession and that 2012’s economic picture will remain gloomy.

He said that exports will likely be sluggish as the UK’s main export markets in Europe are in recession and other markets are slowing down, while investment is “unlikely” to be buoyant against this background.

Mr Corfe said: “Weak growth over the coming quarters means we expect the Chancellor to miss his deficit targets from 2012/13 onwards by a wide margin, as tax receipts grow at a much slower rate than the OBR expects.

“Our latest forecasts show the government borrowing over £100bn even by 2016/17, with the debt to GDP ratio edging up to over 90 per cent compared with the OBR’s forecast of 76 per cent.”

Along with other economists, Mr Corfe expects that BoE to expand its QE programme over the coming months.

He said: “We expect the asset purchase facility to be gradually expanded from its current level of £275bn to some £400bn by the end of the year.

“With growth likely to remain weak for much of the next five years, we also expect the Bank of England’s base rate to remain on hold at 0.5 per cent until 2016.”

Ian Kernohan, economist at Royal London Asset Management, believes that the decline in GDP is “pretty close” to Bank of England and Office of Budget Responsibility expectations and so should not have major implications for monetary or fiscal policy in the near term.