U.K. Economy Shrinks

The U.K. economy shrank in the fourth quarter of 2011, leaving Britain on the brink of recession and complicating the government's goal of tackling the budget deficit, official data showed Wednesday.

In its preliminary estimate, the Office for National Statistics said gross domestic product contracted 0.2% between October and December after growing by 0.6% in the third quarter. The annual growth rate for 2011 was 0.9%.

Chancellor of the Exchequer George Osborne said the data were disappointing but not entirely unexpected due to the slowing world economy and the euro-zone crisis.

"Britain has substantial economic problems, debt built up over the past 10 years, and we are dealing with those, but the truth is that dealing with those problems is made more difficult by the situation in the euro zone," he said.

Economists expect the economy to slow further in the first few months of 2012, with output contracting in the first quarter. If that trend is confirmed, the U.K. would technically be in recession—defined as two consecutive quarterly contractions—for the first time since the second quarter of 2009.

"Our bet is that the U.K. is now back in recession and that the economy will continue to contract for most of this year," said Vicky Redwood, chief U.K. economist at Capital Economics.

Weighing on the economy is a toxic combination of weak consumer and business confidence, tight credit conditions, rising unemployment, high living costs, muted wage growth and the deepening euro-zone debt crisis.

The lack of economic growth will have a significant impact on the government's central goal of eliminating the structural budget deficit due to falling tax receipts and the rising cost of unemployment benefits.

The contraction will also intensify pressure on the Bank of England to expand its quantitative-easing program of asset purchases next month to try to stimulate the economy.

The detail of the GDP data showed production industries—in particular manufacturing—were the biggest drag on economic growth, with production falling 1.2% in the fourth quarter. Output in the construction sector decreased by 0.5%, while output in the dominant services sector was flat.

Industrial production makes up 15.4% of GDP, construction around 7.6% and the services sector around 76.3%.

An ONS official said the public strike Nov. 30—which saw hundreds of thousands of state workers strike over pension reform—was likely to have had an impact on GDP, but he said it wasn't possible to measure it directly.

Sterling weakened in advance of the GDP data, and shortly after the release it was trading at $1.5560 compared with $1.5620 late in the New York session Tuesday.

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