UK set for triple-dip recession after economy slammed into reverse with 0.3% contraction at end of 2012

The UK economy slammed into reverse at the end of last year, raising the unprecedented spectre of a triple-dip recession this year. 

Official estimates today showed that gross domestic product shrank by 0.3 per cent in the final quarter of 2012 - a massive reversal from strong 0.9 per cent growth in the third quarter. The Office for National Statistics said economic output as a whole remained flat in 2012.
Although output in the third quarter was fuelled by one-off factors, the fourth-quarter deterioration was worse than the 0.1 per cent that most economists had expected.

Economic gridlock: Some analysts think the cold snap has cost Britain more than £500million a day in lost output

David Tinsley at BNP Paribas said 'it's clearly a bit larger than the consensus and ourselves were expecting'.

'I would hope that we will get a bounce in the first quarter, but of course the snow does pose a risk to that,' he added. 'So, there is a risk of a triple-dip (recession) in the UK, even if it is for somewhat erratic reasons.'

WHAT IS A TRIPLE DIP AND ARE WE IN ONE?

 If there is a contraction of output in the current quarter (for which figures will not be available until the spring) then the UK economy is officially in recession again.
That follows two recent recessionary periods (April 2008 to June 2009 and Oct 2011 to Jun 2012), without a return to robust growth in between - this is what informally has been labelled a 'triple dip'.
The UK plunged into a double-dip recession last year, contracting for three quarters in a row before bouncing back with growth of 0.9 per cent in the three months to September.
According to the Office for National Statistics, there has not been a triple-dip recession since its records began in 1955, with Britain last suffering such economic gloom in the Great Depression.
But the UK did experience some shaky economic times in the 1970s, when the economy came very close to a triple-dip recession, slipping in and out of negative territory.
But then Britons also faced eye-watering stagflation in the 70s, when negative GDP combined with high inflation.
Economists believe the chances of a triple dip now are high, given that there has been no let up in the pressure on consumers and businesses and the current snow disruption is threatening to cost the economy an estimated £500million a day.

A recession is defined by two consecutive quarters of contraction, so the economy would have to shrink this quarter as well, but that will not be revealed until the spring.

Current economic activity, however, has been hit by the snow, which some analysts think has cost Britain more than £500million a day in lost output.

The figures increase the pressure on Chancellor George Osborne at a time when all three major ratings agencies have the country's prized AAA status on negative outlook.
Sterling fell to a five-month low against the dollar and to its lowest against the euro in over a year after the data was released.
Chris Williamson at Markit said that today's numbers 'have greatly increased the risk of ... a downgrading of the UK's AAA credit rating'.
'(They) pile ever more pressure on the Chancellor to seek ways to revive the economy in the March Budget,' he added.

The IMF chief economist yesterday said that Britain needs to 'make some adjustments' to its austerity measures if the economy is not to stagnate.

Olivier Blanchard Blanchard said George Osborne needs to 'take stock' of his Plan A in the March Budget.

The ONS said the UK had recovered only half of the fall in GDP seen since the start of the 2008 recession, with output still 3.3 per cent lower than its pre-recession level.
The biggest drag on GDP came from the production and manufacturing sector, which saw output fall 1.8 per cent quarter-on-quarter, according to the ONS.
Within this sector, mining and quarrying suffered the biggest drop in activity since official records began, down 10.2 per cent, due mainly to the shutdown of the Buzzard oil field in the North Sea amid extended maintenance work.

Howard Archer at IHS Global Insight said that this one-off factor 'contributed 0.2 percentage point to the GDP contraction'.

He added that, 'There was also undoubtedly some payback in the fourth quarter from the Olympics-lifted GDP spike of 0.9 per cent quarter-on-quarter in the third quarter.

'We believe the economy is essentially flat-lining.'

The powerhouse services sector, which accounts for 77 per cent of the economy, saw activity grind to a halt in the fourth quarter due to the absence of the Olympics boost in the previous three months.

The Office for National Statistics said the economy shrank by 0.3 per cent in the last three months of 2012, which meant there was no growth overall last year

The construction sector delivered a 0.3 per cent rise in output, but economists said even this was a lot lower than surveys had indicated.

Today's figures from the Office for National Statistics represent the initial estimate of fourth-quarter GDP and are subject to revision over subsequent months, and James Knightley at ING warned against reading too much into the data.

'The problem with that is that the quality of this report is so poor. The most accurate thing we can say is that taking this and other reports together, the data is consistent with ongoing stagnation in the UK economy - the year on year GDP growth rate remains at 0.0 per cent, the same as in Q3 2012.

'That said, we are hopeful of a gradual improvement through 2013. Global optimism is improving with the euro zone situation looking less calamitous.

'Furthermore, the general data flow outside of the UK has been looking a little more encouraging and this should help support risk sentiment. Sterling has been softening, which is helping UK competitiveness, while the Bank of England's Funding for Lending Scheme is also helping to improve credit conditions.

'UK employment is also looking good right now and so if these trends can all remain in place there is the platform for the UK economy to start performing more strongly as we progress through the year.'

Up and down: The UK economy has been on a rollercoaster ride for the last two years