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Spectre of recession looms as UK GDP drops 0.2%

By Peter Cripps

The United Kingdom is edging closer to recession again after figures revealed the economy shrank by more than expected in the last quarter of 2011.

The 0.2% contraction between October and December, estimated by the Office for National Statistics (ONS), is likely to be followed by a further decline in the current quarter, economists warned.

Despite the threat of recession - defined by two quarters in a row of GDP declines - Chancellor George Osborne insisted he will stick by the austerity measures which have been blamed for choking UK growth.

He said: "Britain has substantial debts. If we don't deal with those debts, our problems will be worse."

Today's fall - below City forecasts for a decline of 0.1% - was driven by a 0.9% contraction in manufacturing and a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating.

A small impact is also likely from the public sector strikes on November 30, when nearly a million working days were lost.

Over the course of 2011 as a whole, GDP increased by just 0.9%, much slower than the 2.1% growth in 2010. Most economists think the return to recession will be mild compared with the slump of 2008/09, when output dropped by more than 7%.

But Bank of England governor Sir Mervyn King warned last night that the UK economy faces an "arduous, long and uneven" road to recovery and said weaker inflation meant there was more scope for further emergency money printing.

The Bank is increasingly likely to inject billions of pounds into the UK economy through quantitative easing in February, after declining to do so earlier this month.

Minutes from this month's meeting showed the Bank's Monetary Policy Committee found that "substantial" risks to the UK economy remained and it will be some time before uncertainties surrounding the risks are resolved.

These uncertainties included how strongly UK output growth would recover in the second half of 2012 and whether euro-area governments would be able to tackle their debts and balance their economies.

James Knightley, an economist at ING Markets, said UK economic activity is likely to get worse before it gets better.

He said: "That said, we are more optimistic on the second half, given tax changes will put an extra £1 billion in the pockets of low and middle-income earners while compensation payments from the mis-selling of payment protection insurance will also help.

"Key will also be the sharp drop in inflation, which could finally allow real incomes to turn positive in late 2012."

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