By Maximilian Clarke

The UK’s GDP contracted by a fifth of a percent during the fourth quarter of 2011, as fears that continued instability in the Eurozone coupled with low business confidence exacerbated by austerity measures in the UK could see the economy re-enter a recession.

Jeremy Cook, chief economist at foreign exchange company, World First reacted to the news, noting that the figures are preliminary and that the UK is unlikely to continue the contraction needed to qualify for recession:

“…we think that this is a blip and a double-dip recession in the UK is still avoidable. Preliminary figures are always volatile and the possibility of an upgrade over the coming months is possible. This number will mean higher unemployment, however, and lower business and consumer confidence in the short-term. Queue further calls from members of the opposition that the coalition government cannot keep cutting as it is."

However, Richard Driver, analyst for Caxton FX, observes a recent string of negative economic indicators, adding that the UK economy is in fact entering a recession.

“This morning’s UK GDP figure is certainly disappointing but with sterling gaining after the release it is quite obvious the market was positioning itself for an even worse showing. The services sector has just about kept its head above water, however, manufacturing and construction has been a letdown and the labour market is still in the doldrums.

“Yesterday’s IMF downgrade of UK growth prospects this year has certainly been vindicated and the data clearly strengthens the argument that the UK economy is heading into darker times.

“With the eurozone debt crisis likely to weigh on European and domestic growth for many more months to come, the UK looks likely to enter a technical recession.“

The Forum of Private Businesses chief executive Phil Orford said that there was no getting away from the disappointing nature of the figures.

“There’s no escaping it, the figures are disappointing. But it’s important to put it into perspective. Quarter 4 in 2010 saw a significantly higher contraction of 0.5%, which was attributed to the snowy weather, followed the next quarter by positive growth," he said.

“While there wasn’t a repeat of the weather for Q4 2011, there was the equally damaging eurozone debt storm which hugely dented confidence among consumers and businesses. People are erring on the side of caution and are holding back on spending and growth plans.

“You can also factor in to the equation two days of public sector industrial action, and a 4% drop in energy consumption due to the mild autumn. None of these helped.

“So it’s by no means certain that the economy will continue with negative growth for this current quarter, although if there is any growth it will be small.

“We urge the Government to drive forward, and quickly, with plans to help small firms grow the economy. As the Coalition has often said, it will be SMEs who deliver the necessary growth for UK plc.”

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