David Cameron 'disappointed' as economy shrinks


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Indy Politics

David Cameron admitted today he was "disappointed" by figures showing the UK economy shrank in the final quarter of last year.

The Prime Minister said the worse-than-expected 0.2% contraction showed that the country was facing "extremely difficult economic times".

The Office for National Statistics' first estimate for the figure marks the first time the UK's gross domestic product (GDP) has fallen since the final quarter of 2010 when the Arctic weather was blamed for a 0.5% drop. The City had pencilled in a decline of 0.1%.

The contraction was driven by a 0.9% fall in manufacturing, a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5% fall in the construction sector, while the powerhouse services sector ground to a halt.

A small impact is also likely from the public sector strikes on November 30, when nearly a million working days were lost.

At Prime Minister's Questions in the Commons, Labour leader Ed Miliband said the coalition was out of "excuses" for the poor performance.

Mr Cameron said: "These are extremely difficult economic times. These are disappointing figures, they are not unexpected figures."

The Premier said they reflected the "overhang" of debt run up under the previous government, high food and commodity prices, and the eurozone crisis.

He insisted the Government had to stick to its "credible plan" to tackle the deficit, which had delivered record low interest rates.

Mr Miliband accused the Prime Minister and Chancellor George Osborne of "smug complacency" and claimed people were "fed-up" with the Government's "excuses" for the flatlining economy.

He said: "What has characterised the Government's approach throughout this period? Total arrogance.

"How bad do things have to get in our economy to shake you out of your complacency?

"You and your Chancellor are but the byword for self-satisfied, smug complacency and that is the reality."

The disappointing fourth-quarter performance represents a strong slowdown on the 0.6% growth in the previous quarter.

Over the course of 2011 as a whole, GDP increased by just 0.9%, much slower than the 2.1% growth in 2010.

Today's GDP figures followed yesterday's downgrading of UK growth forecasts by the International Monetary Fund (IMF).

Britain is expected to grow at just 0.6% this year, down from previous forecasts of 1.6%, and 2% in 2013, down from 2.4%, the IMF said.

The organisation revised its forecast for expansion in global output from 4% to 3.25% this year, as "intensifying strains" in the euro area drag on the rest of the world.

IMF managing director Christine Lagarde was meeting Mr Osborne at 11 Downing Street today.

Their discussions undoubtedly covered the prospects for the global economy, as well as the IMF's call for a 500 billion US dollar boost to its lending facilities. There is speculation that the UK may be asked to contribute £17 billion.

Ms Lagarde used a speech in Berlin on Monday to press Germany to put more financial weight behind the eurozone bailout funds to support ailing economies such as Greece, and she said today that combining the European Financial Stability Fund with the European Stability Mechanism would "send a very strong sign of confidence in Europe".

Downing Street confirmed today that Britain believes IMF resources should be used only to shore up countries, not currencies such as the euro.

Mr Osborne has said that if he believes there is a strong case for an increased UK contribution, he is ready to put the issue to Parliament for approval.

IMF chief economist Olivier Blanchard suggested that the UK mught have to consider slowing the speed of cuts in the short term if growth is worse than expected.

Mr Blanchard told the BBC: "If growth is really dismal, then you may decide that you're going to go a bit more slowly about the discretionary part of the budget and for the UK there's some indication that this happened with respect to the revision in potential output.

"Yes, to the extent that these countries are not under the gun from the markets, have plausible medium-term plans, they can slow down and it would help."

Asked if the UK could reduce the scale of cuts, Mr Blanchard replied: "You have some room to do something if needed, yes, if growth were to be even worse than we have forecast."

But he warned: "There's another issue which is if you have announced the plan and you deviate from the plan you may lose credibility. So given that the UK has announced the plan, moving from it is a bit more difficult than it might be for another country."

Mr Balls seized on Mr Blanchard's comments, telling BBC Radio 4's The World At One: "The chief economist of the IMF says that if growth is undershooting in Britain, the Government here in Britain should consider changing course to slow down the pace of spending cuts and have some tax cuts to get growth and jobs moving in our economy.

"That strikes a chord with what I have been saying and Labour has been saying for 18 months."