Policymakers had optimistically forecast a V-shaped recovery, but yesterday’s dismal data makes a U or W-shape far more likely as prospects for the UK economy remain clouded.
Bill Gross, co-founder of investment fund Pimco and one of America’s most influential investors, added to the gloom yesterday when he slammed Britain. He warned: “The UK is a must to avoid. Its gilts are resting on a bed of nitroglycerine.”
Economists had based their forecasts on surveys, which pointed towards a speedier recovery. But some are now warning that the figure could well be revised downwards at a later stage to show continued contraction in the last quarter of 2009.
Andrew Lilico, chief economist of Policy Exchange, said: “This is just the preliminary estimate, and the chances of it being revised down by 0.1 per cent or more are about evens, so we may well still be in recession.”
He added: “It now seems certain that there will be a double dip back into recession next year, and that may come as soon as the first quarter.”
“The level of GDP may not recover to pre-recession levels until the second quarter of 2012. We are not out of the woods yet by any means,” said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.
This slip back into recession could come as early as April and at the height of the general election campaign. This could dash Labour hopes that a strong return to growth in the first half of 2010 will boost their re-election chances.
The weak data will also trouble the Bank of England, which had forecast growth of 0.3-0.4 per cent in the final three months of 2009. The Monetary Policy Committee had been widely expected to at least pause its quantitative easing policy at its February meeting, but analysts said the GDP data had made the outcome much harder to predict.
Jamie Dannhauser at Lombard Street Research, who thinks yesterday’s data underestimates the strength of the recovery, said: “The balance of evidence does not yet warrant a further expansion of the asset purchase facility – a conclusion we ultimately expect the MPC to reach.”