Shock as GDP shrinks by 0.7%

The UK's recovery hopes were dealt a further blow today after shock figures showed the economy shrank by a worse-than-expected 0.7% between April and June.

Dire construction and manufacturing output drove the biggest decline in GDP since the height of the financial crisis three years ago, alarming forecasters who had expected a much smaller 0.2% fall.

An extra day's bank holiday for the Queen's Diamond Jubilee and the wettest April to June period on record played a significant part in the fall, according to the Office for National Statistics (ONS).

But economists said the figures also laid bare an "underlying weakness", with some branding the quarter a "disaster".

Although the figures are a preliminary estimate and may be revised, they show the UK economy has now contracted for three quarters in a row, making it the UK's longest double-dip recession since quarterly records began in 1955.

The last double-dip recession was in the 1970s, when the economy was hamstrung amid soaring oil prices and a miners' strike, but that lasted only two quarters.

Pressure mounted on the Government today to do more to stimulate growth as Chancellor George Osborne faced renewed criticism that his austerity measures are choking off the recovery.

Shadow chancellor Ed Balls said: "These shocking figures speak for themselves. As we warned two years ago, David Cameron and George Osborne's ill-judged plan has turned Britain's recovery into a flatlining economy and now a deep and deepening recession.

"And with Britain just one of two G20 countries in a double-dip recession and borrowing now going up as a result, it is clear that this Government's plan has failed. If these figures don't make the Chancellor wake up and change course, then I don't know what will.

"Thank goodness the Olympics will give our economy a much-needed shot in the arm. But this short-term boost is not enough - we need a plan B now to get the economy moving again and radical reforms to set Britain on a new course for jobs, growth and long-term prosperity. The longer the Chancellor refuses to act, the heavier the price our country will pay."

TUC general secretary Brendan Barber said: "The Government's austerity strategy is failing so spectacularly that it has wiped out the recovery completely."

The UK's economy is 0.3% smaller than when the coalition came to power in the second quarter of 2010, the ONS figures showed.

Mr Osborne said he could not use the Jubilee as an excuse and said the "disappointing" figures highlight the UK's "deep-rooted economic problems".

He said: "We're dealing with our debts at home and the debt crisis abroad.

"We've made progress over the last two years in cutting the deficit by 25% and businesses have created over 800,000 new jobs.

"But given what's happening in the world, we need a relentless focus on the economy and recent announcements on infrastructure and lending show that's exactly what we're doing."

The pound fell against the euro as the data increased chances that the Bank of England will pump more emergency money into the economy or drop interest rates further.

Many economists have questioned the ONS's figures, saying they are at odds with industry surveys and jobs figures, which have been much more upbeat.

Bank of England governor Sir Mervyn King has warned the economy will "zig-zag" this year as special events such as the Jubilee and the Olympics create erratic trends.

And a CBI survey seemed to contradict the ONS figures today as it showed that output in the manufacturing sector was steady in the three months to July.

Andrew Sentance, senior economic adviser to PwC and a former member of the Bank's Monetary Policy Committee, said: "Both employment data and retail sales show a more resilient picture of the UK economy.

"Business surveys have also been pointing to sluggish growth rather than decline.

"However, UK business surveys have weakened in response to the impact of the euro crisis and this is the biggest source of worry for the UK economy at the moment."

Vicky Redwood, chief UK economist at Capital Economics, said there was a possibility that the GDP figures are underestimating the true strength of the economy but added that it would take "pretty hefty revisions" to make the recent performance look even half decent.

She said: "What's more, the UK still faces significant obstacles, not least the knock-on impact of the renewed tensions in the eurozone.

"Even allowing for a decent bounce-back in the third quarter, we still expect the economy to contract by about 0.5% this year and to grow by only 0.5% in 2013."

In a round of broadcast interviews at the construction site for the new Crick Institute biomedical centre in central London, the Chancellor said the UK faced a "big challenge".

But he said 800,000 jobs had been generated in the private sector over the last two years.

"There are some bright spots in the economy," he said. "Jobs are being created."

He insisted the Government would not increase borrowing in a bid to kick-start the economy.

"I think that would take us out of a difficult situation into a very, very bad situation."

Mr Osborne flatly denied that his role directing Conservative Party strategy was detracting from his work in the Treasury.

"I'm 110% focused on the economy. I have got one job which is to be Chancellor of the Exchequer. I am relentlessly focused on that."

David Cameron said: "These are obviously very disappointing figures and they show the extent of the economic difficulties that we're grappling with, not least the situation right across the eurozone where our neighbours are also really struggling."

The Prime Minister added: "It's vitally important we redouble all our efforts to get on top of our debts, deal with our deficit, get our economy moving.

"What has happened in the last two years is a private sector recovery with 800,000 extra jobs in the private sector, 400,000 more jobs in our economy as a whole.

"But clearly we've got to keep doing everything we can to get out of this difficult situation and provide the growth and jobs that our people and our economy needs."

Business Secretary Vince Cable said: "Clearly we are dealing with news today which is disappointing and it underlines the very difficult economic conditions under which we are operating."

Mr Cable said that more needed to be done to boost growth through what he termed a "Plan A-plus".

But he described the choice between cutting the deficit or promoting growth as "a false dichotomy", insisting the Government must do both.

He distanced himself from comments by Liberal Democrat ally Lord Oakeshott, who branded Mr Osborne a "work experience chancellor" and called for him to be replaced by Mr Cable.

Lord Oakeshott told BBC Radio 4's World At One: "George Osborne has got no business experience, he has never worked outside politics. He is doing surprisingly well for a chancellor on work experience.

"But really in a torrid time like this I think we do need absolutely the best people available."

Mr Cable responded: "We have a very good team in the Government and the Treasury and I work very harmoniously with them."

Commenting on Lord Oakeshott's remarks, Mr Cable said: "He is not an adviser. He is a personal friend I have known for many years, but he is an independent political and economic commentator with strong views of his own. I don't happen to agree."

Speaking at a press conference at his Department for Business, Mr Cable left no doubt that he wants to see the Government come forward with further measures to boost growth.

"Budget discipline is a necessary but not a sufficient condition for recovery and for rebalancing the economy," said the Business Secretary. "We clearly do need a strong growth strategy. That is partly about demand, and that is where the Bank of England's aggressive policies are central.

"But we also need policies to stimulate long-term growth, which is the kind of things that the Government has produced over the last few days, with the funding-for-lending scheme which is designed to inject some life into the banking system, and the policies for supporting major infrastructure projects.

"That's building on a lot of things that have already happened, and no doubt there will have to be more. But that is the package, that is the overall structure of what we are trying to achieve."

He added: "The GDP figures are obviously disappointing and I think we shouldn't be surprised, actually. There is an enormous problem that we are trying to grapple with.

"It is a combination of things. We have a broken banking system and a massive deficit problem which we are slowly but surely working our way through. We have a very difficult external environment in our main export market - which is the EU - because of the crisis conditions there.

"But we have a very clear strategy for dealing with it, which people label in different ways.

"I call it my Plan A-plus, which means accepting that we have the necessity for budget discipline but that that has to be augmented by growth policies, including the industrial strategy approach which we have been developing in this department, including a very aggressive monetary policy which the Bank of England is continuing to pursue and pursuing flexibility in the way we apply our fiscal rules, which the Chancellor has certainly done."

PA