Business

OECD predicts recession in the UK

  • 29 March 2012
  • From the section Business
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People in a cafe in London
Service sector figures for January showed growth in distribution, hotels and restaurants

The UK economy will contract in the first three months of 2012, taking the country back into recession, according to the Organisation for Economic Co-operation and Development (OECD).

But many other analysts are predicting economic growth in the first quarter.

Figures from the Office for National Statistics (ONS) on Thursday showed the UK service sector grew 0.2% in January compared with December.

The figureis a major component of the growth figures for the first quarter.

The biggest contribution to the monthly increase came from deliveries, hotels and restaurants.

Gross domestic product (GDP) figures for the first three months of 2012 will be released by the ONS on 25 April.

The OECD is predicting an annualised contraction of 0.4%for GDP in the first quarter, which would suggest a 0.1% contraction compared with the previous quarter, which is the headline figure that the ONS releases.

"This is a forecast... Our own forecast from our own independent body, which we published last week, says we are going to avoid a recession," said Chancellor George Osborne.

The Office for Budget Responsibility has predictedthat there will be growth in the first quarter of 2012.

On Wednesday, the figure for the fourth quarter of 2011 was revised to show the economy contracted by 0.3%, more than earlier estimates had suggested.

The revision was due to the service sector having been less strong than previously thought.

Shadow chancellor Ed Balls blamed government policy for the lack of growth.

"Last year the deputy head of the OECD said if growth is slower than expected the government should slow down the pace of tax rises and spending cuts.

"That is what the OECD is now forecasting and, with our economy flatlining for over a year, it's time the chancellor listened to wise advice," Mr Balls said.

Zig-zag economy

The UK has been alternating between quarters of growth and contraction since the middle of 2010.

Chart showing GDP for past six quarters

Bank of England governor Sir Mervyn King has forecast that the economy will continue to zig zag between positive and negative growth this year.

He predicted that the economy would contract in the second quarter of 2012 as a result of there being an extra bank holiday in June for the Diamond Jubilee.

The service sector accounts for about three-quarters of the UK economy.

The 0.2% increase in January followed 0.3% growth in December.

"While services output was hardly spectacular in January, it was a solid enough performance after a decent gain in December and supports hopes that the economy has returned to growth in the first quarter," said Howard Archer at IHS Global Insight.

Encouraging signs

The chancellor pointed to some positive recent data.

"We will see what the data shows in the next few weeks but there's been some more encouraging economic signs in recent months," Mr Osborne said.

Thepurchasing managers' index(PMI) for the service sector in February suggested the sector was still growing, but at a slower pace.

But there have been weaker signs coming from other parts of the economy.

The index of production, which includes the manufacturing sector, unexpectedly fell 0.4% in January from December.

The PMI for manufacturing in February suggested it had slowed down further compared with January.

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