UK economy contracts in fourth quarter

Chancellor George Osborne vowed to stick to his program of cuts and tax rises despite GDP figures.

Story highlights

  • UK economy shrank 0.3% in final quarter of 2012; triple dip recession now more likely
  • British economy has essentially stagnated for 2½ years
  • Chancellor George Osborne vowed to stick to his austerity drive on Thursday

Britain's economy shrank 0.3 per cent in the final quarter of last year, increasing the likelihood it would slide into a "triple-dip" recession and piling pressure on the coalition government.

The economy, which has essentially stagnated for 2½ years, pulled out of its shallow double-dip recession in the third quarter of the year but contracted again in the fourth quarter by more than the 0.1 per cent economists had expected.

The market reaction was swift and clearly showed traders had been wrong-footed by the extent of the GDP contraction. Sterling, which had been higher versus the dollar at about $1.58, immediately lost 50 pips to change hands at $1.5747, while 10-year gilt yields fell 1.5 basis points from their session highs to take benchmark borrowing costs to 2.025 per cent.

George Osborne vowed to stick to his austerity drive on Thursday, regardless of whether the data showed the UK economy shrank at the end of last year

Sir Mervyn King, governor of the Bank of England, warned Britons earlier this week not to read too much into the fourth quarter growth figures.

Quarter-to-quarter changes in growth rates tell us little about the underlying strength of the economy, affected as they are by one-off factors such as the Diamond Jubilee and the Olympics," he said