Economic woe: It’s worse than we thought

We were braced for a fall, but thanks to collapsing production, Britain’s economy is in a far worse state than anyone expected.

Britain's economy shrank more than expected in the last three months of 2012, after output from the North Sea and manufacturers crashed.

And with cold weather costing the economy £500 million a day, a triple-dip recession looks almost certain when the next figures are released in April.

The Office for National Statistics said on Friday that Britain's gross domestic product fell 0.3% in the fourth quarter - a sharper fall than the 0.1% decline analysts expected.

The news will be a blow for David Cameron, after the Government was forced to defend its austerity programme against criticism from the International Monetary Fund's chief economist.

The economy is now 3.3% smaller than its peak in the first three months of 2008, recovering only about half the output lost during the financial crisis - a worse performance than other major economies.

What dragged us down?

The biggest driver for the fall in GDP was a 10.2% drop in mining and quarrying output, the biggest since records began in 1997, driven by disruption to North Sea oil and gas fields.

Slightly smaller amounts of damage were done by a falls in factory output and in the 'Government and other services' category, where the London Olympics had boosted sports and recreation services in the third quarter.

At the start of 2013 one-off factors, such as January's snow, may seal the fate of an economy on a knife-edge between growth and contraction, with major retailer John Lewis already warning on Friday that snow had hit sales growth.

Bank of England governor Mervyn King expects no more than a "gentle recovery" this year, while this week the International Monetary Fund cut its 2013 forecast for British economic growth to 1.0% from 1.1% predicted in October.

However, even such lacklustre growth could be derailed, as some analysts and business groups warn, by a hit to firms' and consumers' confidence from talk of a triple-dip recession.

That prospect will add to pressure on the ruling coalition of Conservatives and Liberal Democrats to loosen its deficit-cutting drive and bolster the economy, or risk a hammering in the 2015 elections.

Output in Britain's service sector - which makes up more than three quarters of GDP - was flat in the fourth quarter after rising 1.2% in the third.

Industrial output was 1.8% lower, while construction - which accounts for less than 7% of GDP - grew by 0.3%.

[Source: Reuters]