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UK Economy: GDP Drop Predicted After IMF Scales Down 2012 Growth Estimate

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The government's austerity measures will face scrutiny today when official figures are expected to reveal the economy contracted in the final quarter of 2011.

Economists predict the Office for National Statistics will report a 0.1% fall in GDP, marking a sharp slowdown on the 0.6% rise in the previous quarter and fuelling fears of another recession - two quarters in a row of declines.

The punchy third-quarter growth is expected to have been snuffed out by a squeeze in consumer spending as wages failed to keep pace with inflation, which peaked at 5.2% in September.

A fourth-quarter decline would leave Chancellor George Osborne open to fresh criticism that his austerity measures are choking off the economy after unemployment recently hit a 17-year high.

But whatever the outcome in the last quarter, prospects for the next few months remain grim.

The International Monetary Fund said on Tuesday that the UK's economy will grow by just 0.6% in 2012, down from its previous estimate of 1.6% as "intensifying strains" in the euro area drag on the rest of the world.

But such is the depth of eurozone debt crisis that this would make it the best performing major economy in Europe. Germany is set to grow just 0.3% and France 0.2%, but the UK will fall behind the US and Japan, which are expected to grow 1.8% and 1.7% respectively.

Labour and the unions have already laid siege to his policies, saying that the government needs to concentrate on creating new jobs to inject new life into the economy and a contraction would provide more ammunition.

Bank of England governor Sir Mervyn King said last night that the UK faced an "arduous, long and uneven" road to recovery and said more stimulus measures could still be on the cards.

He warned that the recovery from the banking crisis will be slow and 2012 will not be an easy year. With inflation falling, there was scope to leave interest rates at their record lows and for another round of quantitative easing if needed, he added.

He said: "Starting from a position of excessively leveraged balance sheets, the path of recovery is likely to be arduous, long and uneven.

"The position of the world economy, especially in the euro area, is serious. But there is no reason to despair.

"Helped by the right policy actions, the UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past 15 years."

While some economists think the UK may have narrowly avoided a contraction in the fourth quarter, there is general agreement that the economy has ground to a halt.

It has been hindered by the eurozone debt crisis hurting exports, and after warm weather in October and November hit sales of winter clothes and meant people used their central heating less.

And falling demand at home and abroad pitched the manufacturing industry, which the government had hoped would spearhead the recovery, into decline.

But a better December fuelled optimism that the economy may have been flat in the quarter or even scraped meagre growth.

Retailers laid on special offers in a bid to attract shoppers, helping the powerhouse services sector, which accounts for three quarters of the economy, to put in a better than expected performance.

Philip Shaw, chief economist at Investec Securities, expects GDP to have declined by 0.1% driven by a fall in manufacturing. He expects further falls in both the first and second quarters of 2012.

He said: "The better news is that we expect the downturn to be shallow and reasonably short.

"Indeed it is quite possible that the ONS revises it away in due course, but for now expect headlines over a double dip."

But Chris Williamson, an economist at Markit, believes the economy avoided contraction but failed to grow.