UK recession warning boosts hopes that Bank will pump cash into economy

The Bank of England decided against quantitative easing at its latest meeting but economists predict QE of as much as £50bn will be introduced next month. Photograph: David Levenson/Alamy

Fresh warnings that the UK started going into recession in the final quarter of last year have increased expectation that the Bank of England is poised to pump more electronic cash into the economy as soon as next month.

A leading thinktank, the National Institute for Economic and Social Research (NIESR), estimated that UK economic growth halved last year and ground to a virtual halt in the final quarter of 2011. Its estimate for growth of just 0.1% over October to December followed news that industrial production declined for a second successive month and by more than expected in November.

Output from industry – which includes energy and mining, as well as manufacturing – fell 0.6% in November, to a level 3% lower than a year earlier.

The drop deals another blow to the government's hope that the industrial sector can pick up the slack from a shrinking public sector and faltering consumer spending. Economists said the numbers reinforced expectations that Britain's economy would have stalled or even shrunk in the fourth quarter.

Against that backdrop, the Bank of England is widely expected to step in soon, with billions more in electronic cash under its quantitative easing (QE) programme, although it chose to stay its hand at the end of its latest meeting on Thursday. Interest rates were also kept on hold at 0.5%.

"There is a growing risk that the recession started in the fourth quarter of last year rather than in the first quarter of this year," said Philip Shaw, economist at Investec. "Overall, £50bn more QE next month seems to us to be virtually 'baked in the cake'."

The Office for National Statistics also revised down its estimate for industrial output in October to show a 1% decline compared with a 0.7% fall previously. Within the sector, manufacturers trimmed output by 0.2% in November but the continued decline, after a 0.9% fall in October, underlined the fragility of the sector that the government hoped would lead Britain's recovery. It releases its first estimate of fourth-quarter GDP on 25 January.

Samuel Tombs, at Capital Economics, said the latest data suggested the industrial sector was heading straight back into recession.

"These falls mean that overall production is now 3.5% below its recent peak set at the start of 2011 and some 12.5% below its pre-recession level," he said.

"What's more, even if we generously assume production holds steady in December, the industrial sector will still knock 0.2% or so off overall GDP growth in the fourth quarter, despite its small size,."

NIESR said its estimate for virtually no expansion at the end of 2011 meant growth for the year as a whole was just 1%, down from 2.1% in 2010.

Labour's shadow Treasury minister, Chris Leslie, seized on NIESR's estimates as a warning shot to the government.

"Our recovery was choked off well before the recent eurozone crisis, but if the government refuses to take urgent action to get our economy moving again, then I fear this stagnant growth is set to continue into 2012," he said.

"This is bad news for families, businesses and for the deficit too," he added, referring to how much more the government will have to borrow with high unemployment and sluggish growth.