Britain in double-dip recession as growth falls 0.2pc

Britain is officially back in recession after the economy shrank unexpectedly by 0.2pc in the first three months of the year.

It followed a 0.3pc fall in gross domestic product in the fourth quarter of 2011, signalling a technical recession and Britain’s first double-dip since 1975.

Economists had expected the Office for National Statistics data to show the economy grew by 0.1pc between January and March.

The shock fall in output is a major blow for the Chancellor, who was forced to defend his austerity drive which is expected to weigh further on growth in the coming months.

He said: “It’s a very tough economic situation. It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime.

“But over many years this country built up massive debts, which we are having to pay off. The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.”

A breakdown of the figures showed widespread weakness throughout the economy. Construction output fell sharply by 3pc between January and March, while the industrial sector shrank by 0.4pc, and the services sector - which accounts for three quarters of the UK economy - grew by just 0.1pc.

Prime Minister David Cameron said Britain’s slide back into recession in the first quarter was “very, very disappointing” but that it would be "absolute folly" to change course and jeopardise Britain's low borrowing rates. He told Parliament:

"We inherited from [Labour] a budget deficit of 11pc. That is bigger than Greece, bigger than Spain, bigger than Portugal [...] The one thing we mustn’t do is abandon spending and deficit reduction plans, because the solution to a debt crisis cannot be more debt.”

picture painted by respected business surveys indicated the underlying economy was stronger than the ONS suggested.

Our reaction to these figures is one of disbelief. The divergence between the stronger survey data and dire official output estimates is virtually unprecedented and must raise significant question marks over the quality of the data,” said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.

The official construction data is the source of much of the controversy, but the slow rate of growth in the services sector was also questioned, because it is at odds which other surveys which suggest the sector is growing rapidly.

The ONS defended its data on Wednesday.

Joe Grice, ONS chief economist, said: “We have no reason to suspect that these figures are any less reliable than usual.”

He said however that the first estimate of GDP should come with "a health warning" attached, because it was based on just 40pc of the data the ONS will ultimately collect for the first quarter.

The Bank of England said last week that it could not rule out "GDP falling for three successive quarters," because of the weak construction sector and the extra bank holiday associated with the Queen’s Diamond Jubilee celebrations.

The contraction also provides little comfort for Britain's outlook, with most of the government's austerity cuts yet to come into effect.

Figures released yesterday by the ONS showed that the government borrowed £2bn more than expected in March, but managed to meet its full-year target because of downward revisions to previous months.

Total borrowing for the financial year came in £11bn lower than the same period last year, providing relief for the Chancellor who has repeatedly restated his commitment to austerity in an attempt to drive down the deficit and preserve Britain’s AAA credit rating.

Ratings agency Fitch put the UK on negative outlook last month, meaning that there is a one in two chance that the UK's credit rating will be downgraded over the next two years.

Fitch regarded the Government’s fiscal plans as “credible”, but said that its decision to take a negative outlook reflected “the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery”.

In January, Moody's said the UK faced a one in three chance of a downgrade, while Standard & Poor's (S&P) affirmed the UK's AAA rating last week. S&P expects Britain's public debt burden to peak in 2014.