Triple-dip recession looms as economy shrinks by 0.3%

If economy contracts in the first three months of this year, the UK will be back in recession for the third time in five years

Fears that Britain will slip into a “triple-dip recession” grew today when official figures showed that the economy shrank by 0.3 per cent in the last three months of 2012.

The worse-than-expected figures from the Office for National Statistics (ONS) will increase the pressure on the Chancellor George Osborne to announce an economic Plan B in his March Budget to boost growth and slow the pace of his spending cuts.

Today’s figures were disappointing because they showed that  manufacturing declined by 1.5 per cent between last October and December compared to the previous three months, while the services sector was flat.  Construction rose by 0.3 per cent in the final quarter.

If the economy also contracts in the first three months of this year, the UK will be back in recession for the third time in five years. The bad weather could depress the first quarter figures, adding to the risk of a “triple-dip recession.”

Joe Grice, chief economist at the ONS, said the underlying trend in the economy was “flat”, with no growth in 2012 as a whole and “a bumpy economy on a rather sluggish trend.” He said the decline in the final quarter of last year was partly due to the comparison with stronger growth in the previous three months, which was boosted by sales of Olympic Games tickets. That effect reduced the Gross Domestic Product (GDP) figure for the final quarter by 0.2 per cent.

Lee Hopley, chief economist at EEF, the manufacturers’ organisation, said: “There are no positive takeaways from today’s first estimate of GDP in the final months of last year. Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy. The news from industry was particularly weak.”

Mr Osborne will insist that Britain remains “on the right track” and will reject calls for a Plan B.  A Treasury spokesman said: “ The official forecast was that the UK economy would contract in the last quarter of 2012 so this figure is not unexpected. It confirms what we already knew - that Britain, like many European countries, still faces a very difficult economic situation.It underlines what the Chancellor said at the autumn statement and the governor of the Bank of England said this week: while the economy is healing, it is a difficult road."

Political pressure on Mr Osborne for a change of course is likely to be joined by the Liberal Democrats. Although they are not calling for a Plan B, they are pressing privately for more major building projects to revive the flatlining economy.  In an interview with Parliament’s The House magazine published today, Nick Clegg admitted the Coalition made a mistake by cutting such capital spending when it was formed in 2010.  He described his remarks as “self-critical” but they lifted the veil over differences between the two Coalition parties.

The figures could provoke further pressure on the Chancellor from senior figures at the International Monetary Fund for him to ease the pace of his cuts.

Ed Balls, the shadow Chancellor, said: “These deeply disappointing figures expose just how dangerously complacent the Prime Minister was when he said last autumn that the ‘good news will keep coming’.  Today's news confirms what business leaders, retailers and families have known for many months - that depressed confidence and a chronic shortage of demand mean our economy continues to flatline. This Government’s failing plan has now seen our economy stagnate for over two years and borrowing is now rising as a result.”

Mr Balls added: “It is grossly irresponsible and out of touch of George Osborne to once again try to shrug off bad news and refuse to heed the advice now coming to him from right, left and centre.”