Britain's economy may have entered a mild recession in the last three months of 2011, hampering the government's core policy aim of spurring growth and raising the chances that the Bank of England will inject more cash soon.
Britain's recovery from the 2008/2009 recession - the deepest since the depression-hit 1930s - has already been sluggish, and unemployment has crept up to a 17-year high as the government cuts spending deeply to erase a huge budget deficit.
The economy shrank by 0.2 percent at the end of 2011, the Office for National Statistics said on Wednesday, a bit more than economists expected as a stagnating services sector failed to offset a slump in manufacturing and construction.
As we feared, a decline in GDP in Q4 is likely to be the first leg of a technical recession, said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.
For 2011 as a whole, GDP expanded by 0.9 percent, less than half the pace recorded in 2010. The fourth-quarter contraction in output follows a 0.25 percent decline in German GDP, and if UK output falls in the first three months of 2012, Britain will enter its second recession in three years.
The minutes from the Bank of England's January policy meeting showed that the central bank inched closer to pumping more money into the faltering economy as risks from the global economy still loomed large, despite some improvements.
The central bank voted unanimously to keep the total volume of quantitative easing asset purchases steady at 275 billion pounds and interest rates at their record low of 0.5 percent.
For some members, the risks of undershooting the (inflation) target meant that a further expansion of asset purchases was likely to be required, the minutes said in a slightly more assertive tone than last month.
But the minutes also noted that the European Central Bank's actions to provide unlimited long-term liquidity had helped to moderate the most serious risks.
Bank Governor Mervyn King said on Tuesday that Britain faced an arduous, long and uneven recovery, and that the central bank had scope for another cash boost, if needed, as inflation is falling.
The drop in GDP also increases the chance that the Bank of England will approve a further 50 billion pounds of quantitative easing in February, once the current 75 billion pounds of purchases started in October are complete.
The decline is slightly bigger than that expected by the Bank -- which repeated its view that output would be broadly flat in the fourth quarter 2011 and the first in 2012 -- and the independent Office for Budget Responsibility, which assesses whether the government's fiscal plans are sustainable.
The contraction will be a blow to the Conservatives, which is facing growing criticism from the Labour Party over its flagship five-year austerity programme.
Chancellor George Osborne, who has pinned his reputation on erasing the budget deficit and bringing Britain's 1 trillion debt burden down, was quick to reiterate that the deficit reduction was the right thing to do.
These are disappointing figures ... but they are not entirely unexpected, because of what's happening in the world and what's happening in the euro zone crisis, Osborne said.
Britain has substantial economic problems, debt built up over the past 10 years, and we are dealing with those, but the truth is dealing with those problems is made more difficult by the situation in the euro zone, he continued.
Labour has accused the government of focusing too much on spending cuts rather than boosting growth as a way to reduce record public debt levels, which breached the one trillion pound barrier in December.
Economists are generally split as to whether the economy will continue to contract in early 2012, but all stress that any decline will be modest compared to the record 7.1 percent fall in output in the last recession in 2008-09.
Many economists have noted signs of improvement in the United States and even the euro zone, where Germany's key Ifo business climate index rose the third month in a row, signalling the largest economy of the euro area was avoiding recession.
In Britain, manufacturing, electricity and gas, and distribution, hotels and restaurants were the main contributors to the fall in output, each subtracting 0.1 percent from GDP.
Manufacturing output fell 0.9 percent on the quarter, its biggest drop since Q3 2009. Output in the services sector, which accounts for 76 percent of GDP, was flat on the quarter, its weakest outturn since Q4 2010.
(Additional reporting by Fiona Shaikh, Keith Weir and Olesya Dmitracova; Editing by Ron Askew)