Are we going back into recession?

Image caption Some economists predict the economy is on a downward path

So the economy contracted 0.2% in the last three months of 2011 - does that mean we're in a double-dip recession?

Although for many it may already feel like a recession, most economists consider a recession to be two consecutive quarters of negative growth. We only have one negative quarter so far, but it may be that we are in a period of recession and just do not know it yet.

It is worth mentioning to start with that the figures for the fourth quarter of 2011 were only preliminary figures, which may be revised in the coming months and years.

The figure of -0.2% is easily close enough to zero that revisions could take it to a positive figure in future, although it could, of course, go the other way so that we end up with a more negative figure.

This graph shows the positive and negative revisions that have been made to preliminary GDP figures since 1997.

If we assume for now that the fourth quarter of 2011 will remain negative, the question is whether the first three months of 2012 will show growth or contraction.

There has been talk of the economy going into 2012 with positive momentum and there is some evidence for this.

The services sector, which accounts for more than 70% of the economy, showed zero growth in the fourth quarter, but that is not the whole story.

The Office for National Statistics (ONS) publishes a monthly Index of Services, the November figures for which came out with the GDP data.

It showed that in October, the service sector contracted by (a revised) 0.6%, while in November it grew by 0.6%.

So the ONS is clearly assuming from the partial data available for December that the service sector did not grow or contract in the last month of the year.

It looks as if the quarter started with a very weak October, followed by a stronger November and a flat December.

One of the more influential reports on the state of the service sector suggests that December was rather stronger than the ONS is currently saying.

The Market/CIPS purchasing managers' index (PMI) for the service sector in December suggested that the sector had grown at its fastest pace for five months.

But while the PMI painted a rosier picture of the fourth quarter than the ONS, its outlook for 2012 was not optimistic.

"Looking ahead... companies grew increasingly worried about the coming year, suggesting that the upturn may prove short-lived as we move into 2012," said Markit chief economist Chris Williamson.

Even those predicting growth for 2012 are not expecting very much growth. The Office for Budget Responsibility is predicting 0.7% growth for the whole year while the IMF revised its forecast down to 0.6% on Tuesday.

Either of those forecasts would allow for a negative first quarter followed by moderate growth in the rest of the year.

Stimulus measures

But all of this ignores the possibility of unexpected factors influencing growth, either positively or negatively.

On the positive side, the minutes from the Bank of England's January interest rate-setting meeting, which were also released on Wednesday, suggested a strong possibility that it would be taking steps to boost growth in the first three months of the year.

It predicted that economic growth would be "broadly flat" in the first quarter of 2012, but said there were "substantial risks" to UK activity.

The committee's members decided that an expansion of their quantitative easing programme of asset purchases should not yet be extended, but some of them concluded that a "further expansion of asset purchases was likely to be required".

While the Bank of England could take steps to boost growth, it is unlikely that the government would take significant measures to influence the first quarter, because it has a Budget due on 21 March.

On the downside, all the forecasts cite the eurozone as a big danger, and if a debt deal cannot be reached with Greece then the effects on the eurozone and knock-on effects on the UK could be severe.

So it is possible that we are already back in recession, but it is also possible that the economy will keep its head above water in the current quarter.

But it is difficult to find anybody predicting very much growth for the first three months of 2012.

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