Britain's economy shrank in the fourth quarter of last year despite higher consumer spending and strong export growth as businesses slashed investment, official data showed on Friday.

The Office for National Statistics confirmed earlier estimates that the economy shrank by 0.2 percent quarter-on-quarter, growing by 0.7 percent on the year - a slight downward revision.

Consumer spending rose by 0.5 percent on the quarter - the first quarterly increase in 1-1/2 years - while exports jumped 2.3 percent.

But gross fixed capital formation dropped by 2.8 percent, with business investment falling 5.6 percent on the quarter.

Most analysts now reckon Britain will just about avoid another recession and that growth will slowly pick up through this year after business surveys and market confidence pointed to an improvement at the start of 2012.

The Bank of England, which added another 50 billion pounds of stimulus earlier this month, predicted that GDP growth was likely to remain weak in the near term but would gradually strengthen, reaching an annual rate of around 3.0 percent by the first quarter of 2014.

BoE Governor Mervyn King said that quarterly growth this year would probably zigzag due to an extra public holiday, with a quarter of contraction likely, and policymaker Paul Fisher said in an interview that the outlook for the economy was incredibly uncertain and that he was keeping an open mind as to whether more quantitative easing would be required.

If anything, I feel slightly more comfortable about the inflation outlook than the outlook for growth, Fisher said in an interview with London financial freesheet City A.M.

And part state-owned bank Lloyds also warned of a challenging year ahead, expecting a fall in revenue for 2012, after posting a hefty loss for 2011.

The German economy also contracted by 0.2 percent in the final quarter of last year and, despite some encouraging surveys and an agreement about a second bailout for Greece, the euro zone is still teetering on the brink of a renewed recession.

Slow growth in Britain and high unemployment are keeping up pressure on finance minister George Osborne to ease austerity and announce measures to boost the economy in next month's budget statement, but any big giveaways look unlikely as Britain still has its work cut out to reduce its huge budget deficit.

(Reporting by Sven Egenter and Olesya Dmitracova)