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Eurozone crisis live: UK economy contracts by 0.2%

• Double-dip recession fears as UK GDP falls
Today’s agenda
Follow live Davos coverage here

10.01am: A fall of 0.2% is bad, but it could easily have been worse.

The detailed breakdown of the figures shows that without a rise in ‘government services’ such as health and education, which were up by 0.4% on the quarter, GDP would have fallen even faster, by 0.3%.

9.59am: Joe Grice, the ONS’s chief statistician, has refused to be drawn on whether this marks the onset of
recession.

Grice restricted himself to:

We have announced a relatively small reduction in economic activity; what happens next, we’ll have to wait and see.

9.56am: Here’s some instant analysis from the Office for National Statistics briefing, from Heather Stewart, the Observer’s economics editor:

It’s worth remembering that the OBR was expecting a negative quarter, which will help George Osborne will brush this off – but another contraction in the Spring would mark a recession, which would be far harder to explain away.

So much for the march of the makers Osborne hoped would lead the economy
to recovery: production output (which also includes mining and energy) fell by 2.6% in 2011.

9.53am: Over the past year as a whole, the UK economy has eked out growth of just 0.8%, the ONS says.

So don’t expect Ed Balls to stop doing that ‘flat-lining’ hand gesture any time soon!

9.47am: Some in the City reckon the UK is back in recession (defined as two or more consecutive quarters of contraction). Vicky Redwood, chief UK economist at Capital Economics, said:

Of course, we won’t know for sure whether the economy is actually back in recession until we get Q1′s figures. And it is of some comfort that the CIPS/Markit business surveys were heading up at the tail-end of Q4. But this might just have been a temporary improvement. Indeed, our bet is that the UK is now back in recession and that the economy will continue to contract for most of this year.

Meanwhile, January’s monetary policy committee (MPC) minutes suggest that the committee remains split on whether further asset purchases are needed, with some members still not convinced that inflation will fall below the target in the medium-term. However, there were clear signs that at least some will vote for more QE next month – for these members, “the risks of undershooting the target meant that a further expansion of asset purchases was likely be required.” Mervyn King’s speech last night suggests that he is in this camp. Indeed, we expect another £75bn of QE to be announced next month.

Minutes of the Bank of England’s last meeting a fortnight ago, released this morning, revealed its rate-setting committee voted unanimously to keep monetary policy on hold.

9.40am: The ONS is getting into the nitty-gritty of today’s data.

Estate agents saw an increase in activity in the fourth quarter, it said, but it was offset by a downturn in banking and legal services.

Overall, business services and finance output was flat.

And with that, an ONS press officer brings the briefing to a close, telling the assembled media:

Thanks for coming, have a wonderful day.

9.37am: Joe Grice, the ONS’s chief statistician, describes the 0.2% decline as ‘relatively minor’.

The ONS also estimated that November’s strike probably had some impact on GDP, but we can’t quantify it yet (that’s via our colleague Heather Stewart is at the ONS briefing).

9.35am: The breakdown of the GDP numbers reveals that manufacturing acted as a big drag on the economy. Factory output fell by 0.9% between October and December, the biggest quarterly fall since the autumn of 2009. Overall industrial production, which also includes utilities and mining, was down 1.2%.

Construction output fell by 0.5% while service industries recorded a flat performance.

9.32am: More on the UK GDP numbers. The Office for National Statistics’ first estimate for the fourth quarter (-0.2%) showed the first contraction in a year. In 2011 as a whole, the economy grew by 0.9%, less than half the pace of 2010.

9.30am: The British economy shrank by 0.2% in the fourth quarter of 2011, according to official figures, edging closer to a recession. This is slightly worse than economists expected – they had pencilled in a 0.1% contraction. In the third quarter, the economy had grown 0.6%.

9.23am: While we’re waiting for the fourth-quarter GDP figures for the UK, out at 9.30am, why don’t you take a look at my colleague David Shariatmadari’s live blog on Davos.

The Office for National Statistics is holding a press conference for the release of the GDP figures in Westminster, from where Heather Stewart, the Observer business editor, will be reporting.

9.07am: Germany’s closely-watched Ifo business sentiment index is out. It climbed for a third month to hit 108.3 in January, against forecasts of 107.6. The index is based on a monthly survey of around 7,000 companies. This boosted the euro to a session high of .3052.

Economist Klaus Abberger of the Munich-based research institute Ifo said the weak euro had helped the German economy, and that a recession seemed unlikely.

8.46am: On currency markets, the yen has dropped to one-month lows against the dollar and the euro, after Japan reported its first annual trade deficit since 1980.

However, some were sceptical that this would have a lasting impact on the yen. Takuji Okubo, chief economist at Société Générale in Tokyo, said:

Japan’s current account balance is still in surplus, as the income from japan’s vast foreign assets, boht direct investment as well as its security investments, is more than offsetting the deficit from trade. In addition, capital flows are much more important for the yen than trade flows.

Meanwile, the pound slipped as traders braced themselves for a negative fourth-quarter GDP number for the UK. Sterling fell to .5558, down from a three-week high of .5629 hit overnight.

8.39am: Citi economist Michael Saunders has digested BOE governor Sir Mervyn King’s speech from last night. He says the speech – one of only three major speeches the governor aims to give each year – paves the way for more QE, while also highlighting King’s view that the UK also needs further substantial banking reform and supply-side reform.

The governor makes two key points. First, he stresses the unavoidable weakness of the economy, and big uncertainties in the outlook.

Second, the governor argues the case for three key policy responses. This includes “monetary policy – to prevent the deleveraging process from tipping the economy into a renewed severe downturn…And, with inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target.” The governor goes about as far as he can to indicate that extra QE is likely soon, and also subtly reiterates the MPC’s view that QE is appropriate if the MPC faces risks of inflation undershoot, and is not just reserved for the rare cases when deflation threatens. In addition, King stresses the BoE’s willingness to backstop banks in event of a crisis. “The Bank of England stands ready to provide liquidity to healthy banks against good collateral should market conditions deteriorate” but repeats his calls for banks to raise their capital ratios by squeezing pay and dividends.

King ends with some relatively optimistic comments – relative to the gloomy tone of the rest of the speech that is. “The position of the world economy, especially in the euro area, is serious. But there is no reason to despair. All crises come to an end, and businesses will find ways to trade with each other and meet the needs of consumers whatever the transitional problems posed by deleveraging. Helped by the right policy actions, the UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past fifteen years.” But he makes it clear that policy will play a key role in determining whether or not we get to that “more sustainable footing”, again reinforcing the case for extra QE.

8.29am: Marc Ostwald, strategist at Monument Securities, looks ahead to today’s events:

While the spectre of Greece descending into a disorderly default will cast a very long shadow over the day’s proceedings, there is so much else to digest that should plenty of food for thought, and may even provide some challenges to what are reasonable market assumptions: e.g. that the BoE’s MPC will deliver more QE in February, that the FOMC will push out its forecasts for the expected timing of its first rate hike… and a German 30-yr Bund auction, where the 30 bps concession that has been built in over the past week may still not be enough to attract much demand, particularly with equivalent maturity [French] OATs yielding 3.88%.

Bank of England governor Sir Mervyn King certainly hinted at more QE last night, when he said the path to economic recovery would be “arduous, long and uneven”. He warned that the huge debt burden run up by households, banks and the government would weigh on the economy for years to come. The comments came after official figures showed the UK’s national debt had surged past £1tn for the first time.

8.14am: Larry Elliott, our economics editor, reports from Davos this morning that the Occupy protests appear to have influenced the tone of this year’s World Economic Forum.

From a snowy Switzerland, Larry writes that:

The theme of this year’s Davos is the Great Transformation, the title of a book written in the 1940s by Karl Polanyi. It was a critique of 19th Century laissez faire capitalism, which Polanyi said could not survive in its pure utopian form.

There seems to be a nervousness around this year about whether the current model is sustainable either. The first sessions this morning include a debate on Capitalism (Is 20th century capitalism failing 21st century society?); Global Risks 2012: The safety of our safeguards; and another Global Risks 2012: The seeds of dystopia.

Seems like the protests of the Occupy Movements have had some effect!

The Daily Telegraph’s Jeremy Warner is also in Davos, and reports on Twitter that the eurocrisis is dominating the event:

#Davos. Just caught up with Ben Verwaayen of Alcatel who says business in Europe is frozen until decisions r made re future of the euro

— jeremy warner (@jeremywarnerUK) January 25, 2012

8.11am: Here’s today’s agenda:

• German Ifo business climate data released – 9am GMT / 10am CET
• UK GDP for Q4 2011 released – 9.30am GMT
• Minutes of Bank of England’s January meeting – 9.30am GMT
• Germany auctions €3bn of 30-year bonds – 10.15am GMT / 11.15am CET
• US Federal Reserve announces interest rate decision – 17.30pm GMT /
12.30pm EST

+ World Economic Forum begins annual meeting in Davos

8.08am: The cuts in the IMF forecasts have cast gloom over the World Economic Forum’s annual meeting, writes Larry Elliott, the Guardian’s economics editor, from Davos.

This is the fifth meeting of the global policy elite since the start of the financial crisis in 2007 and each has had its own mood: concern in early 2008, total panic in the dark winter of 2009, tentative optimism in 2010 that the worst was over, confidence in 2011 that better times were just around the corner, and now the sense that recovery will be longer and tougher than most of the Davos crowd ever envisaged.

Read more here.

8.03am: European stock markets have got off to a good start. The Dax in Frankfurt and the CAC in Paris are both up 0.5%, while Spain’s Ibex has climbed 0.4% and Italy’s FTSE MIB 0.6%. The FTSE 100 index in London has risen more than 18 points to 5770, a 0.3% gain.

7.51am: IMF chief Christine Lagarde reiterated this morning that combining the European Union’s temporary EFSF rescue fund with the permanent ESM mechanism would help restore confidence and create a firewall to stop the Greek crisis spreading to Italy and Spain.

She told Europe 1 radio:

If the two of them could make a common European pot, that would send a very strong sign of confidence in Europe.

Lagarde, a former French finance minister, said the next few weeks would be crucial for the world economy, after the IMF slashed its global growth forecast to 3.3% for 2012 yesterday. She called for measures to boost growth and competitiveness, as well deficit as reduction plans in some countries.

If the right decisions are taken in the coming weeks, not only at the heart of the eurozone – which is essential – but also in the United States, Japan, in the major emerging economies, then the end of 2012 will be better than the beginning. But only if the right decisions are taken.

7.22am: Good morning and welcome back to our rolling coverage of the world economy and European debt crisis. The Davos summit in Switzerland gets underway today, while in the UK the main event is the release of the fourth-quarter GDP numbers.

City economists reckon the economy slipped back to a 0.1% decline between October and December, following 0.6% growth in the previous quarter. The International Monetary Fund slashed its 2012 growth forecast for the UK yesterday to a paltry 0.6%, from 1.6%. However, even so Britain is set to outperform other major European economies – beating Germany (0.3%) and France (0.2%).

Minutes from the last Bank of England meeting a fortnight ago are also out this morning, and could shed some light on how much debate there was with regard to further asset purchases. In the US, following last night’s State of the Union address by Barack Obama we have the first FOMC meeting of 2012.

Michael Hewson, market analyst at CMC Markets, said:

The three more hawkish dissenters to “operation twist” have left the committee and have been replaced with arguably slightly more dovish members. This meeting will give markets the opportunity to determine the credentials of each new member, as well as how much more dovish this committee will be relative to the old one.

At his press conference Bernanke is expected to outline the Fed’s new communication strategy to markets with respect to the future direction of the Fed Funds rate forecasts. The last few policy statements have referred to rates remaining low until mid 2013. This could well change and it will be key to future rate expectations as to how far further out this date gets pushed.

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