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UK GDP falls in the last quarter of 2011

UK GDP shrank by 0.2% in the final three months of last year, according to figures just published by the Office for National Statistics. This is the first fall since the last quarter of 2010. Most economists had expected a drop of 0.1%, although this is only a preliminary estimate and may well be corrected at a later date.

The UK economy is showing further signs of fragility

The reason for the fall was that output in the production industries decreased by 1.2% in Q4 20111, compared with an increase of 0.3% in the previous quarter. Construction sector output also fell by 0.5%, compared with an increase of 0.3% in the previous quarter. Also, service sector output was unchanged in the fourth quarter, following a 0.7% rise in the previous quarter. One factor which may have contributed to the fall was the concerted strike action in the public sector in November, which saw the loss of almost one million working days.

Overall, the UK economy grew by 0.9% in 2011. Yesterday, the International Monetary Fund reduced its UK growth forecast to 0.6% for 2012, from the previous forecast of 1.6%.

Whether GDP declines again in the first quarter of this year, which would mean the UK would technically sink back into recession, remains to be seen. Much of what happens to the economy depends on levels of confidence.

If consumers are worried by these figures and the continuing rise in unemployment, they may hold onto their cash rather than spending. Firms will also be wary about initiating new investment and GDP may continue to fall further. A major concern is what is going to happen in the eurozone and this is a further drain on confidence in the markets.

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