One-in-four chance of 2012 contraction, OBR says

There is a one-in-four chance that the UK economy will shrink in 2012, the Office for Budget Responsibility (OBR) says, despite the group’s slight improvement in growth expectations.

The OBR’s latest economic and fiscal outlook, published as chancellor George Osborne presented the 2012 Budget, revises the official growth forecast from 0.7% to 0.8%. The increase is based on the view that “the economy carried a little more momentum into the new year than previously anticipated”.

However, the report highlights the “considerable uncertainty” surrounding economic forecasts and warns there is a roughly one-in-four chance that the economy will contract this year, based on past forecasting errors.

The outlook presents the eurozone debt crisis as a major risk to the forecast, which assumes that the sovereign debt crisis is resolved and the currency bloc remains intact.

It adds: “The underlying situation remains fragile and will take time to resolve. The likelihood of a more disorderly event and the way in which it might play out is very uncertain.”

The OBR also says externally-generated inflation, such as that caused by further spikes in oil prices, is another risk to the forecasted growth.