British economy shrinks by 0.2%

Britain’s economy may have entered a mild recession in the last three months of 2011, hampering growth and raising the chance that the Bank of England will inject more cash soon.

Britain’s recovery from the 2008/2009 recession — the deepest since the 1930s depression — has been sluggish and unemployment has hit a 17-year high as the government cuts spending to erase its budget deficit.

British Chancellor George Osborne defended the cuts.

“Britain has substantial debts. If we don’t deal with those debts, our problems will be worse.”

The economy shrank by 0.2% at the end of 2011, the Office for National Statistics said.

“As we feared, a decline in GDP in Q4 is likely to be the first leg of a technical recession,” said Andrew Goodwin, senior advisor to the Ernst & Young ITEM Club.

For 2011 as a whole, GDP expanded by 0.9%, less than half the 2010 pace. If British output falls in the first three months of 2012, the country will enter its second recession in three years.

The minutes from the Bank of England’s January policy meeting showed that the central bank inched closer to pumping more money into the economy as risks from the global economy still loomed large.

The central bank voted to keep quantitative easing asset purchases steady at £275 billion (€328bn) and interest rates at their record low of 0.5%.

“For some members, the risks of undershooting the [inflation] target meant that a further expansion of asset purchases was likely to be required,” the minutes said.

They also noted that the European Central Bank’s actions to provide unlimited long-term liquidity had helped to moderate the most serious risks.

Economists are split as to whether economic contraction will continue in early 2012, but all stress that any decline will be modest compared to the record 7.1% fall in output in 2008-2009.

In Britain, manufacturing, electricity and gas, and distribution, hotels and restaurants were the main contributors to the fall in output, each subtracting 0.1% from GDP.

Manufacturing output fell 0.9% on the quarter, its biggest drop since Q3 2009. Output in the services sector, which accounts for 76% of GDP, was flat on the quarter, its weakest outturn since Q4 2010.

— Reuters