Economy to shrink in 2012: OECD economist

LONDON (Reuters) - Britain's economy looks set to shrink in 2012 after a surprisingly deep slump between April and June, as the euro zone debt crisis and weak domestic demand make a vigorous return to growth unlikely, the OECD's economist for the UK said.

Gross domestic product fell by 0.7 percent in the second quarter, hit by government spending cuts and troubles in the neighbouring euro zone, plus one-off factors such as an extra public holiday to mark Queen Elizabeth's 60th year as monarch.

The lack of growth is putting pressure on an administration which has imposed austerity measures to try to erase a huge budget deficit, and has forced the Bank of England to launch another round of stimulus by buying more government bonds.

"Most of it is really about the external environment - the euro zone crisis is going to weigh on the UK in the coming months," Christophe Andre, Acting Head of the Organisation for Economic Cooperation and Development's (OECD) UK desk, told Reuters on Tuesday.

"Under these circumstances you cannot expect much more than very slow growth," he said. "GDP will probably fall in 2012."

While some City economists have long predicted an economic contraction for the full year, the OECD is the first major international organisation to send such a warning.

In May, the OECD predicted growth of 0.5 percent for 2012, already below the 0.8 percent expansion forecast by the government's fiscal watchdog OBR. The International Monetary Fund cut its forecast to just 0.2 percent earlier this month.

Credit rating agency Moody's, which ranks Britain among the most creditworthy borrowers but changed the outlook on its triple-A rating to negative earlier this year, also lowered its 2012 growth forecast to 0.4 percent from a previous 0.7 percent.

The agency warned that persistent weakness could lower the economy's capacity to grow, which would make it harder for the government to meet its deficit reduction goals and add to downwards pressure on the rating.

BOE LIMITS

Britain slipped into its second recession in four years around the turn of the year, mainly due to a slump in construction.

Andre said the economy is likely to move out of recession in the next few months as some of the output lost between April and June due to special factors such as the Diamond Jubilee holiday and unusually wet weather is recovered.

Taking a small boost from the London Olympics into account, the economy could grow by 0.5 percent or slightly more in the third quarter, he said. But for the full year, growth was likely to be too weak to make up for output lost in the first half.

The OECD economist warned against pinning too many hopes on the ability of Britain's policymakers to revive the economy as long as the euro zone crisis weighs on exports and business and consumer confidence.

"Extending quantitative easing was the right move. The Bank has also tried to put up other measures, like the re-financing scheme, the funding for lending scheme," Andre said.

"It is all useful, but it is not going to kick-start the economy."

The Bank meets again this week and is widely expected to stick to its plan to buy an additional 50 billion pounds' worth of government bonds by November. The policymakers' decision will be announced on Thursday.

Tight credit supply remains a major drag on the economy, while businesses and consumers also lack the confidence to borrow more, Andre said.

A survey by researchers GFK NOP showed that British consumers' gloomy mood failed to improve in July.

Asked whether the government should loosen its austerity drive, OECD economist Andre pointed to comments from OECD head Angel Gurria, who backed Chancellor George Osborne's plan.

"There are particularly acute dangers on appearing to waver or appearing to hesitate or appearing to lose a little bit of nerve," Gurria said last week.

(Editing by Catherine Evans)