IS UK GOING TO DOUBLE DIP?????

By: Antonia Oprita
Web Producer, CNBC.com

Britain's "awful" gross domestic product figure for the fourth quarter is pushing the country closer to a double-dip and limits the central bank's ability to fight rising inflation, analysts and business leaders said Tuesday.The UK was the first country in the G7 to release economic growth figures for the last quarter of last year and the 0.5 percent GDP contraction, instead of an expected 0.5 percent expansion, sent the pound 1 percent lower against the dollar [GBP=X 1.583 -0.0156 (-0.98%) ] and the euro [GBPEUR=X 1.1553 -0.0168 (-1.43%) ] and knocked down European stocks.David Blanchflower, a former Bank of England Monetary Policy Committee known for his dovish stance and currently a professor of economics at Dartmouth College, said the figure was "awful, dreadful."

Britain's government, formed of a coalition of Conservatives and Liberal Democrats, has implemented tough austerity measures to cut state spending and increase revenues in order to persuade markets it is still worthy of its triple-A investment grade.

From January this year, Value Added Tax, a tax on sales, has increased to 20 percent from 17.5 percent, and various benefits will be cut.

"This is obviously very worrying, just at a time before the VAT increase hits so this looks awfully like the UK is headed back to double-dip," Blanchflower told CNBC.

'One L of a Recovery'

Graeme Leach, chief economist at the UK business leaders' organization Institute of Directors, also thinks the chances of the UK falling into a double-dip recession have increased.

"We are experiencing 'one L of a recovery' instead of the classical V-shaped economic cycle," Leach said.

UK Chancellor of the Exchequer George Osborne blamed the contraction in GDP on effects from the weather in the harshest December on record and said his austerity plans will not be derailed.

But former UK Prime Minister Gordon Brown, in an interview with CNBC, disagreed.

"Whatever you take account of in terms of the weather it's clearly a trend where the rate of growth has been slowing," Brown said.

"You've got to have a deficit reduction plan that doesn't impede growth," he added.

Leach also thinks the problem may be more serious than just a blip due to bad weather.

"Even allowing for weather-related effects, fourth quarter growth was at best flat," he said. "Moreover, the idea that output will bounce back sharply in the first quarter of 2011 needs to be tempered by awareness of the VAT hike."

Business Secretary Vince Cable said the probability of a double-dip was not rated very highly and that there have been some encouraging figures from the manufacturing sector.

However, as Rob Carnell, UK economist at ING pointed out, falls in the traditionally strong construction and services sectors led the contraction.

"Increases in utilities production were insufficient to offset these, and were hampered by declines in the extraction industries, though that looked more like an ongoing, yet worsening trend than any weather-induced fluke," Carnell wrote in a note to clients..

The Bank of England's hands are tied when it comes to fighting inflation, as it will probably have to take more quantitative easing steps, according to Blanchflower.

"I think people have underestimated the sheer size of this shock," he said.



http://www.cnbc.com/id/41249868