Third recession set to smash Britain

Britain is on track for a triple-dip recession, one of the nation's leading forecasters has signalled, as new figures on Britain's manufacturing industry dealt a blow to recovery hopes and sent sterling crashing to a fresh 2-year low against the US dollar.

The economy shrank 0.1 per cent in the three months to February, the National Institute of Economic and Social Research estimated. That followed a 0.3 per cent decline in the final quarter of last year. If the economy continues to contract for the three months to the end of March, Britain will officially be in its third recession since the financial crisis of 2008.

The institute's monthly estimate of Britain's economic output was a slight improvement on the three months to January, which showed the economy fell 0.2 per cent. But it said the data suggested that "the economy continued to flatline in the first two months of this year".

The bleak outlook followed figures from the Office for National Statistics showing that industrial activity, including manufacturing, shrank far more sharply than expected in January. Separate office numbers showing a slight improvement in the balance of trade for the month provided little solace from the 1.2 per cent decline in industrial production between December and January. Economists had expected expansion of 0.1 per cent.

"This is the penultimate nail in the coffin in terms of triple-dip - it's pretty much game over now," said Alan Clarke, an economist at Scotiabank. "Unless we have a stellar performance from the services sector, we're almost certainly in a triple dip."

Anxiety that Britain's economy will slide back into recession is hurting market confidence in the Britain, forcing down the pound and pushing the cost of insuring government debt up at the fastest pace of all major countries, according to Bloomberg data.

Credit-default swaps insuring gilts have risen 76 per cent from a four-year low in November of 26 basis points. That marked the biggest rise among 67 governments tracked by Bloomberg. It is now more expensive to insure Britain's debt than that of countries including Finland, Denmark, Germany and Austria, with rising swap prices signalling a deterioration in investor sentiment.

Last year, Britain's debt was considered the safest among the biggest European borrowers amid concern that the eurozone would fracture and the cost to Germany of supporting weaker members would surge.

The pound also fell sharply against the US dollar yesterday, touching $US1.4832 at one point, the lowest level since June 2010. It was also trading close to a 28-year low against the Australian dollar, which was buying 69.3 pence.

The decline in industrial production was again caused largely by North Sea oil platform shutdowns, but the manufacturing sector also disappointed. Following a 1.6 per cent increase in December, manufacturing - which remains the country's largest single industry - fell 1.5 per cent.

The trade figures were a little better than hoped, with the deficit in goods and services in January shrinking slightly from £2.8 billion in December to £2.4 billion in January. The goods deficit, which some had feared would widen from £8.9 billion to £9 billion, shrank to £8.2 billion. The improvement was not driven by an increase in exports over the latest three months, but by a 2 per cent decline in imports. In fact, non-oil exports fell 5.4 per cent in the month, the worst decline since last April.

Economists said the weak data could convince the Bank of England to restart quantitative easing, or otherwise loosen policy.

The Chancellor is considering plans to change the bank's remit in the budget to give it a more explicit growth target, with a team in the Treasury reviewing the current mandate. Talks on whether to alter the 2 per cent inflation target are reported to have been held last week between incoming Governor Mark Carney and Sir Nicholas Macpherson, permanent secretary to the Treasury. The Treasury is also considering plans to beef up the Bank's Funding for Lending cheap credit scheme to improve its impact on small businesses.