UK economy shrinks in Q4 2011

The latest figures from the Office for National Statistics show that gross domestic product (GDP) fell by 0.2% in the final three months of 2011.

It was only slightly worse than expected, with many economists forecasting a 0.1% fall.

This means that the UK economy expanded by only 0.9% last year.

The fall in economic output in the final quarter followed GDP growth of 0.6% in the third quarter of 2011.

Whilst this latest GDP figure could be revised upwards, it increases the chances that the UK economy has already entered a recession.

A recession is technically defined as two consecutive quarters of economic decline. If the UK economy has fallen again in the first quarter of this year, we will have entered recession once more.

Whilst it is disappointing to see GDP falling in the final quarter, the economic growth for the year as a whole is in line with official targets from the Office for Budget Responsibility.

Contributions to this GDP fall in the final quarter included poor performance in the manufacturing sector and the economic impact of the public service strikes in November. Nearly a million working days were lost as a result of this industrial action.

Earlier this week we saw the International Monetary Fund cutting their forecast for UK GDP in 2012 from 1.6% to 0.6%.

It is difficult to predict for how long any new recession might last, with the eurozone sovereign debt crisis acting as the deciding factor in any economic recovery closer to home.

Investors should keep in mind that economic performance is not always closely correlated with stock market performance. A sluggish UK economy will not necessarily mean disappointing returns from UK companies, many of which now derive most of their earnings from overseas activity.

Photo credit: Flickr/Christopher Elison