Britain in double-dip recession as growth falls 0.2pc

Britain has been pushed into its first double-dip recession since the 1970s, after a sharp fall in construction output saw the economy contract by 0.2pc in the first three months of the year.

By Szu Ping Chan

http://www.telegraph.co.uk/finance/financialcrisis/9225414/Britain-in-double-dip-recession-as-growth-falls-0.2pc.html

The contraction was driven by a 3pc fall in construction output, while Britain's services sector, which drives 75pc of the economy, grew by just 0.1pc over the period, according to the Office for National Statistics (ONS).

Most economists had predicted growth of 0.1pc, following a 0.3pc contraction in the final three months of 2011.

The shock fall in output is a blow for Chancellor George Osborne, who has come under intense pressure over his austerity drive.

In a statement, Mr Osborne 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.

"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."

The figures also fly in the face of several closely-watched surveys that suggested that the UK had narrowly avoided a double-dip.

Wednesday's estimate is the first of three by the ONS, and is based on just 40pc of the final data, meaning the figure could be revised up or down in the coming months.

Vicky Redwood at Capital Economics, said: "Admittedly, the fall was driven by a sharp fall in construction output and there are question marks over the reliability of these numbers. That said, the drop in construction was smaller than anticipated and even without this, output would have done no better than stagnate. The main disappointment was the meagre 0.1% rise in services output in Q1 - the surveys had pointed to services growth of 0.5% or more."

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.