(Bloomberg News) The U.K. economy shrank more than economists forecast in the fourth quarter as manufacturers cut output and services stagnated, leaving Britain on the brink of another recession.

Gross domestic product fell 0.2 percent from the third quarter, when it increased 0.6 percent, the Office for National Statistics said in London today. The median forecast of 33 forecasts in a Bloomberg survey was for a drop of 0.1 percent. Public-sector strikes over pensions on Nov. 30 had "some impact" on GDP in the quarter, the statistics office said.

Bank of England Governor Mervyn King said yesterday that policy makers can increase stimulus again if needed to aid the economy and guard against a "renewed severe downturn." The International Monetary Fund cut its U.K. growth forecasts as the euro-region debt crisis dims prospects for global growth.

"The basic picture will be one of output meandering around zero until the middle of the year," Brian Hilliard, an economist at Societe Generale SA in London, said in a telephone interview before the report. "It's easily possible we could get another negative number in the first quarter. This does leave the door open for the Bank of England to do more stimulus."

GDP rose 0.8 percent in the fourth quarter from a year earlier. In 2011, it expanded 0.9 percent versus 2.1 percent in 2010.

Industrial production fell 1.2 percent in the fourth quarter, with manufacturing contracting 0.9 percent, the biggest fall for more than two years, today's report showed. Construction shrank 0.5 percent. Services, accounting for about three quarters of the economy, stagnated with zero growth.

Services Stagnate

In a separate report today, the statistics office said services industries grew 0.6 in November from October. On a three-month basis, they expanded 0.1 percent from the previous three months.

With the government constrained by its pledge to all but eradicate a budget deficit of 9 percent of GDP, pressure is growing on the Bank of England to expand it 275 billion-pound ($428 billion) bond buying program when the current round of purchases ends next month.

"With inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2 percent target," King said in a speech late yesterday.

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