UK heading back into recession, says OECD

The UK has slipped back into recession after the economy contracted in the first quarter of 2012, an influential think-tank warned today.

Gross domestic product (GDP) - a broad measure for the total economy - is on course to have fallen by about 0.1 per cent in the three months to the end of March, the Organisation for Economic Co-operation and Development (OECD) said.

The gloomy forecast comes after official figures revealed the economy contracted by 0.3 per cent in the final quarter of 2011, which was worse than the previous estimate of a 0.2 per cent fall.

A decline in the first three months of 2012 will mean the UK is officially back in recession, which is defined as two quarters in a row of declines.

The OECD also warned the recovery for the world's biggest economies would be fragile, with the outlook for Europe "very weak".

The worse than previously thought contraction in the UK in the final quarter of 2011 meant the economy entered 2012 in a worse position than previously thought.

But economists are divided as to whether GDP will fall in the first quarter of the year. A number of upbeat surveys have suggested a return to mild growth in the quarter.

And any slump would be modest compared with the 2008/09 recession and the OECD predicts a return to growth in the second quarter of the year.

The Office for National Statistics today said the powerhouse services sector grew by 0.2% between December and January, after a slight decline in the final quarter of 2011.

However, it is generally agreed that the UK's economic growth will be feeble for the first half of 2012 at least, although falling inflation should increasingly deliver a boost to consumer spending as the year progresses.

The Government's independent forecaster, the Office for Budget Responsibility, predicts the UK will avoid a recession but the economy will grow by just 0.8% over the course of 2012.

Philip Shaw, an economist at Investec, predicts the economy will grow by 0.3% in the first quarter of the year.

He said: "Recent indications suggest the UK's economy will have expanded in the first quarter. Our own view is that the OECD is being too gloomy.

"The services sector appears to have strengthened, the manufacturing sector is recovering since the end of last year and there's been signs of strength in retail spending."

Meanwhile, the OECD warned of a two-speed recovery developing in the G7 nations, with North America enjoying a rapid expansion but Europe weighed down by austerity measures.

The OECD said the recent hikes in oil prices, which have pushed Brent crude to above 120 US dollars a barrel, would push inflation up higher than it previously thought, wiping up to 0.2% from growth across G7 nations over the next year.

It expects Italy. which is already in recession, to contract for te first two quarters of 2012, while France will contract in the first quarter and Germany's growth will be lacklustre.

In November, the OECD warned the eurozone crisis was a key risk for the UK economy and it today called for the firewall to be increased in size to help prevent the crisis worsening.

It last year slashed the UK's 2012 growth forecast to just 0.5% from 1.8% earlier in the year and said it expects unemployment to hit 9.1% by 2013, putting another 400,000 people out of work.