Forecasters fear UK economy has gone into reverse

BRITAIN is tipped to take its first step towards a second recession this week when growth figures for the final three months of 2011 are expected to show the economy went into reverse.

A majority of City economists believe there was a 0.1 per cent contraction during the fourth quarter of last year although better-than-expected data for December has led to some optimism in recent weeks that there may have been zero growth.

However, a raft of influential forecasters, including Citi’s Michael Saunders and the Ernst & Young Item Club, are warning of a significant dip, of 0.2 per cent, marking the first step towards a technical recession.

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Saunders said the GDP figures will be largely dependent on growth in the dominant services sector in November – for which official statistics will also be released this week.

Hopes were raised on Friday when research showed that retail sales volumes gained 0.6 per cent in December but economists cautioned that companies were enticing shoppers through their doors with heavy discounts.

Nida Ali, economic adviser to the Item Club, said: “Despite the stronger retail figures, we still think it likely that GDP will have contracted in Q4.

“October’s strong retail figures didn’t stop a sharp decline in services output in that month, and it is likely to take more … to turn things around for the quarter as a whole.

“We expect the ONS [Office for National Statistics] to report that GDP fell by 0.2 per cent in Q4; the first leg of a short technical recession.”

Philip Shaw of Investec is expecting Britain to stay in recession until the end of June.

“The better news is that we expect the downturn to be shallow and reasonably short,” he said.

“Indeed, it is quite possible that the ONS revises it away in due course, but for now expect headlines over a double dip.”

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Fears over the economy’s decline come as research today shows that profit warnings surged 70 per cent in the closing three months of last year – the biggest quarterly jump for more than a decade.

A total of 88 warnings were issued by companies quoted on London’s main market and Aim during the period, an increase of 51 on the previous three months and the biggest jump since the first quarter of 2001 – when the markets were gripped by fear following the dotcom crash.

Retailers accounted for the majority of warnings, followed by support services firms and software and computer services companies, according to the report from Ernst & Young.

A total of 278 profit warnings were issued in 2011– the highest proportion since 2008. Among Scottish stocks, there was one profit warning, leading to a total of six for the year – the same number as in 2010.

Colin Dempster, head of restructuring at Ernst & Young in Scotland, said: “As evidenced by the sharp jump in the number of warnings issued, 2011 was a tough year for many companies and this year is likely to continue in the same vein.”

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