UK faces bigger ridge to climb after cut in GDP - Independent Online

Fiona Shaikh and Peter Griffiths London

Britain's economy shrank more than previously thought in the final three months of 2011, driven by a weakening services sector and adding to nerves about its ability to return to growth in early 2012.

The Office for National Statistics (ONS) said yesterday that the economy contracted by 0.3 percent between October and December last year, taking the annual rate of growth to 0.5 percent. That was below economists' expectations for unrevised readings of minus 0.2 percent quarter on quarter and 0.7 percent year on year.

Analysts pointed to slight downward revisions in government and private consumption but also to a drop in the scale of contraction of investment, from minus 2.8 percent to minus 0.6 percent.

But aside from the headline revision itself, the numbers offered few new clues to the fate of the economy in this year's first quarter, particularly given that much will depend on government austerity measures that are still to kick in.

"What does it mean? Probably not a lot… It just makes the hill a… bit steeper," said Commerzbank analyst Peter Dixon.

Most economists are pencilling in a small rise in first-quarter gross domestic product (GDP). But some believe that weak construction and consumption data in recent weeks, along with possible disruption in the second quarter due to an additional public holiday, strengthen the argument for the Bank of England to inject more stimulus to boost growth.

"Attention is now firmly focused on whether the economy has returned to growth in the first quarter," said IHS Global Insight economist Howard Archer. "If so, can it build on this in still difficult conditions?"

The central bank restarted its quantitative easing plan last October and is halfway through its latest £50 billion (R605bn) tranche of asset purchases. Most economists reckon it will call a halt to the £325bn plan when it finishes in May.

But two of the nine-member monetary policy committee have called for extra stimulus in the past two months, and analysts said yesterday's data could persuade some of their colleagues to join them.

"On balance it should lead you to expect on the monetary policy side that it will be easier to get another dose of quantitative easing than it would otherwise have been," said Richard Barwell, an economist at Royal Bank of Scotland.

The ONS said the downward revision to fourth-quarter GDP was driven by the transport and communication and financial services sectors. Total service sector output was revised down to show a 0.1 percent fall.

The data showed that household finances remained under pressure, falling 0.2 percent on the quarter, while the saving ratio eased to 7.7 percent, the lowest in the year.

Real household disposable incomes in 2011 fell 1.2 percent, the biggest drop since 1977.

Policymakers have been concerned about the weakness in consumption, though they reckon that falling inflation should help support spending later this year. – Reuters