UK heads towards recession: how bad is it?

THE UK economy shrunk by 0.2 per cent in the last quarter of 2011, according to the Office for National Statistics (ONS). The contraction is worse than the 0.1 per cent that had been expected by analysts and represents a big fall from the 0.6 per cent growth seen between July and September. It all means that in 2011 the economy grew by 0.9 per cent - less than half the 2.1 per cent growth recorded in 2010.

WHY DID THE ECONOMY CONTRACT? The eurozone crisis has had a big impact on the UK economy, with businesses unwilling to lend while there is a risk of the euro imploding. The ONS also believes November's public sector strikes might have contributed to the downturn.

Interestingly, the quarter also saw a fall of 4.1 per cent in electricity and gas production fuelled by the warm weather. Bearing in mind that last year's final quarter decline in GDP was blamed on the freezing weather, the public might be forgiven for asking: What is the correct temperature for the UK economy?

ARE WE IN A RECESSION? A recession is two successive quarters of negative growth, so we cannot know for sure that we are in one until we know the GDP figures for the current quarter, which won't be released until April. Moreover, the figure released today is only preliminary and is subject to revision.

However, that hasn't stopped a number of analysts saying that we are in a double-dip recession. (The 'double-dip' aspect comes from linking the current assumed recession to the one we went through after the 2008 financial crisis.) Last week, both the Ernst & Young Item Club and Centre for Economics and Business Research predicted a GDP contraction for the first quarter of 2012, which would put the UK in recession.   HOW BAD IS IT? Apart from the likelihood of recession, Britain's debt has topped £1 trillion for the first time. The International Monetary Fund has cut its growth forecast for the UK from 1.6 per cent to 0.6 per cent for 2012. Unemployment is at its highest in 17 years, while people in work are experiencing the most sustained fall in take-home pay since the 1920s.

ANY GROUNDS FOR OPTIMISM? If you're an employed homeowner, life isn't too bad. Fears of a recession mean interest rates are unlikely to increase from their current record low for another year. Inflation is also falling, which means your pay packet will go further.

The Governor of the Bank of England, Mervyn King, gave a speech yesterday in which he told his audience not to despair and observed that "all crises come to an end".

He concluded: "The UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past 15 years." · 

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