David Blanchflower, the Monetary Policy Committee member who was the first to warn of the risk of a serious recession in the UK, last night warned that the current policy response, including the Bank of England's plans for "quantitative easing", might not be sufficient to achieve a recovery.
Mr Blanchflower, who warned "the UK economy is in dire straits", said that while he supported the idea of increasing money supply to purchase assets and reflate the economy, even this radical step might take an extended period to pay dividends. "It may be some time before there is a marked improvement in credit availability," Mr Blanchflower warned. "This could imply there is now a case for a large fiscal stimulus, concentrated on employment."
Mr Blanchflower said he expected the Government to offer a further fiscal stimulus in the Budget in April. He said the UK equivalent of the £800bn stimulus package announced in the US by President Obama would be worth around £90bn.
The warning came as further gloomy data underlined the parlous state of the UK economy. The Office for National Statistics said yesterday that the economy shrank by 0.7 per cent in the third quarter of last year, rather than 0.6 per cent, as it had originally estimated.
While the ONS did not revise its figure for the fourth quarter decline, of 1.5 per cent, the updated third-quarter figure means that year-on-year, the economy shrank by 1.9 per cent during the final three months of the year.
Moreover, the data also showed that manufacturing and production output did slow more sharply than first thought at the end of last year, with a slightly better than expected performance from the service sector counteracting this.
The service sector's contribution to the economy, however, is waning too. The CBI warned today that its latest quarterly survey of the service sector showed that jobs are now being lost more quickly than at any time since the research began in 1998. The survey reveals that service sector companies are coping with falling sales and squeezed profit margins, and are now planning significant cuts in investment.
Ian McCafferty, the CBI's chief economic adviser, said: "The effects of a global recession are being keenly felt by services firms. Consumers are clearly reining back on their discretionary spending, postponing holidays and spending less on leisure activities and personal care."