25/01/2012 04:32 GMT | Updated 25/03/2012 06:12 BST

UK Economy: GDP Falls By 0.2 Percent In Q4 2011

The UK economy contracted by 0.2% in the fourth quarter of 2011, the Office for National Statistics (ONS) said, raising fears of a return to recession.

The fall in gross domestic product (GDP) was driven by weakness in the manufacturing sector, as well as a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5% fall in the construction sector.

The services sector, which makes up about two thirds of GDP, did not grow in the last quarter according to the ONS.

There is also likely to have been a small impact from the public sector strikes on November 30, when nearly a million working days were lost, the ONS said.

The drop is the first time GDP has fallen since the final quarter of 2010 when the Arctic weather was blamed for a 0.5% decline. The City had expected a fall of 0.1%.

At prime minister's questions in the Commons, Labour leader Ed Miliband said the coalition was out of "excuses" for the poor performance.

Prime Minister David Cameron said: "These are extremely difficult economic times. These are disappointing figures, they are not unexpected figures."

Cameron said they reflected the "overhang" of debt run up under the previous government, high food and commodity prices, and the eurozone crisis.

He insisted the Government had to stick to its "credible plan" to tackle the deficit, which had delivered record low interest rates.

Chancellor George Osborne told Sky News: "the truth is dealing with those problems is made more difficult by the situation in the eurozone."

"Britain has substantial debts and if we don't deal with those debts our economic problems will be substantially worse," he added, rejecting suggestions that the government should change course from aggressive austerity spending cuts.

The disappointing fourth-quarter performance represents a strong slowdown on the 0.6% growth in the previous quarter.

Overall output increased by 0.8% compared to the same period in 2011.

Growth over 2011 as a whole was 0.9%, the ONS said, but there are concerns the outlook for 2012 as a whole remains very weak.

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.

The figures will fuel fears that the UK's economy is heading for a mild recession - officially defined as two quarters in a row of GDP declines - with economists widely expecting further falls in the first quarter of this year as the economy struggles under the austerity measures and the eurozone debt crisis.

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."

The decline in manufacturing will come as a particular blow to the Treasury because the sector was central to the Government's plans to rebalance the economy by exporting more and importing less.

Today's figures mean the Bank of England 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 that 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.

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."

Prof Philip Booth, editorial director at the Institute of Economic Affairs, said:

"It is not surprising that the latest economic growth figures are grim given the headwinds from the Eurozone. However, this should not tempt the government to change track on deficit reduction.

"There is no evidence that increasing government borrowing will increase economic growth. Indeed, if anything, part of the setback in growth has been caused by the necessary reversal of the irresponsible government borrowing in the immediate post-crash period."