UK Economy Falls Into Double-Dip Recession

Britain has fallen into a double-dip recession, the first official estimate of economic growth so far this year has shown.

The Office for National Statistics (ONS) said the UK's economy contracted by 0.2% in the first quarter of 2012.

It follows a 0.3% decline in Gross Domestic Product (GDP) in the final three months of 2011.

The preliminary estimate, which may be revised later, means the UK is back in a technical recession - defined as two quarters of decline in a row.

It is the first double-dip recession since 1975, dealing a heavy blow to the coalition Government.

The data confounded market expectations that the economy would grow by 0.1% in the first quarter from January to March.

The ONS said the fall in GDP was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth.

Chancellor George Osborne told Sky News: "It's clearly disappointing news, I'm not disguising that.

"It reminds us that Britain faces a very tough economic situation because we built up enormous debts over the last decade, we had an unbalanced economy, and our recovery is not helped by the fact that much of Europe is in recession or heading into recession.

"The question being asked at the moment is, should we borrow even more or spend even more in some discretionary way in the middle of a debt crisis?

"I think the British people understand that that's not right."

Prime Minister David Cameron also defended the Government's economic plans in the Commons on Wednesday.

But TUC general secretary Brendan Barber urged the Government to change its course.

"Austerity isn't working.

"The Government should look across the Atlantic and follow President Obama's alternative that has reduced unemployment and brought growth back to the USA."

Labour's shadow chancellor Ed Balls added: "We consistently warned that their austerity plan was self-defeating and that cutting spending and raising taxes too far and too fast would badly backfire.

"David Cameron and George Osborne arrogantly and complacently dismissed people who warned of the risk of a double-dip recession and the country is now paying a very heavy price.

"Their economic credibility is now in tatters."

The current downturn, however, is not expected to be anything like as severe as the recession of 2008/09, which spanned more than a year.

According to the latest ONS figures, the services sector, which accounts for three-quarters of the economy, saw growth of 0.1% in the quarter, after a decline of 0.1% in the final quarter of 2011.

Retail sales were boosted last month by panic-buying of petrol amid fears of a tanker drivers' strike and a heatwave encouraged people to buy summer clothes.

But the industrial production sector declined by 0.4%, with manufacturing down 0.1% after a 0.7% decline in the previous quarter.

The continued fall in manufacturing will also come as a blow to the Government, which is hoping the sector will lead the recovery.

However, economists and business leaders said the ONS's reading of the economy may be too gloomy, as recent industry surveys for both the manufacturing and construction sectors have pointed to growth.

Chris Williamson, chief economist at Markit, said: "The underlying strength of the economy is probably much more robust than these data suggest.

"The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession."

The CBI added: "This disappointing news comes as a surprise, business confidence has improved since the turn of the year."

The ONS's first estimate is also done before more than half of the data has been gathered, giving hope that the latest figure will be revised higher in coming months.

The influential Ernst & Young Item Club said it would be "very surprised if GDP figures were not revised upwards substantially".

Nevertheless, economists warn that the economy will continue to struggle amid stubbornly high inflation and rising unemployment, while confidence and exports will be hampered by the eurozone debt crisis.

There are fears that the extra bank holiday for the Queen's Diamond Jubilee will hit the current quarter, and it is not known what impact the London Olympics will have in the summer.

Vicky Redwood, chief UK economist at Capital Economics, said even without the fall in construction, "output would have done no better than stagnate" and forecast that GDP will contract by about 0.5% this year.

She said: "The main disappointment was the meagre 0.1% rise in services output - the surveys had pointed to services growth of 0.5% or more.

"Even if the underlying picture is stronger than the official GDP figures show, there is no guarantee that the recent pick-up will continue."

The Institute of Directors said the news meant companies "are less likely to boost investment and recruitment this year".