British economy shrinks in Q4 amid claims recovery will be ‘slow and uncertain’

The British economy shrank in the fourth quarter as companies scaled back investment, underlining the risks to a recovery that Bank of England governor Mervyn King says will be “slow and uncertain”.

GDP dropped 0.2% from the third quarter, the same as previously estimated, the Office for National Statistics said yesterday.

Economists predicted no revision, according to the median of 36 forecasts in a Bloomberg survey. Business investment fell 5.6%, the most since the first quarter of 2011.

While optimism is growing that Britain will avoid recession, King said last week that the central bank was ready to expand stimulus further if needed to aid an economy facing “substantial headwinds”.

Unemployment is climbing, credit is tight, and the government is pushing through the deepest budget cuts in British peacetime.

“We’re pretty certain to see a minor positive number in the first quarter and so are going to avoid a technical recession, but the basic story is one of essentially zero growth through to the summer,” said Brian Hilliard, an economist at Société Générale in London and a former Bank of England official.

“We do need to see a turnaround in investment before we can start to turn a little more optimistic.”

Greece’s €130bn rescue, agreed on by eurozone finance chiefs this week, has buoyed optimism that the debt crisis gripping Britain’s biggest export market has been tamed for now.

German GDP fell 0.2% in the fourth quarter as the sovereign debt crisis damped demand across the euro region and curtailed exports from Europe’s largest economy, the Federal Statistics Office in Wiesbaden said.

France’s economy grew 0.2% during the period, helping to limit the eurozone economy’s contraction to 0.3%.

British purchasing management indexes of manufacturing and services rose in January. Most Bank of England officials argued this month that “growth might be stronger than expected in the near term”, minutes of their Feb 8-9 policy meeting showed. The FTSE 100 index has gained almost 7% this year.

The fall in business investment wiped half a percentage point from GDP in the fourth quarter. Its impact was mitigated by consumer spending, which rose 0.5% from the third quarter, and exports, which gained 2.3%. Net trade contributed 0.6 of a point. Companies added stocks at a quarter of the pace of the previous three months, wiping half a point from GDP, the statistics office said.

With the government constrained by its pledge to all but eradicate a budget deficit of 9% of GDP, the onus for spurring growth remains on the Bank of England. Policymakers voted to expand their bond-buying programme by £50bn (€60.16bn) to £325bn this month, with two arguing for a larger increase.

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