UK recession worse than thought as clouds gather over eurozone

New figures pile pressure on Government while Bank of England warns of Jubilee gloom

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Indy Politics

Britain's recession is even deeper than was thought, according to the latest data from the Office for National Statistics. Economic output in the first three months of this year contracted by 0.3 per cent, the agency said yesterday – more than than the 0.2 per cent reduction it estimated in April.

The news heaps more pressure on the Coalition over its handling of the economy and increases the likelihood that the Bank of England will approve more money printing in the coming months to boost demand. The UK sank into its first double-dip recession since the 1970s last month when the ONS estimated the economy shrank in the first quarter, following a 0.3 per cent contraction in the final three months of 2011. The Bank of England has warned that productivity could also fall in the second quarter of 2012 because of the Diamond Jubilee bank holiday.

The Treasury minister, Chloe Smith, rejected calls for the Chancellor to slow down the planned spending cuts. "We need to stick to our path. It would not be acceptable to fail to deal with our debts," she said. Labour's shadow Chancellor, Ed Balls, said the figures underlined the need for a shift in strategy. "What more evidence can David Cameron and George Osborne need that their policies have failed and that they now need a change of course and a plan B for growth and jobs?" he said.

The International Monetary Fund said this week that the Bank of England should restart its £325bn quantitative-easing programme without delay. It also said the Chancellor should relax his deficit reduction schedule if the economy does not return to healthy growth later this year.

Yesterday's downward revision was prompted by a larger than realised fall in output in the construction sector. The ONS said building activity shrank by 4.8 per cent over the first three months of the year. Central government spending on building projects fell by 13 per cent in 2011 and is scheduled to fall by a further 5 per cent this year. The Deputy Prime Minister, Nick Clegg, said this week that the Government would soon announce "massive" infrastructure projects, but these are expected to be funded by guarantees for private sector investment, not direct state spending.

Further grim economic news came from the Department for Education, which said the number of young people not in work, school or training rose to 954,000 in the first quarter of the year, up from 925,000 in the first quarter of 2011. Yesterday's second estimate of GDP showed consumer spending rose by 0.1 per cent over the quarter and that manufacturing output was flat. Despite the austerity drive, government expenditure rose by 1.6 per cent.

When the first estimate of GDP was released last month many financial analysts cast doubt on the figures, pointing out that several surveys of business activity since the turn of the year had suggested a rise in economic activity. However, there has been an increasing acceptance since then that the economy is indeed in a feeble state.

Clegg fails to bond with Merkel

Nick Clegg was forced to temper his enthusiasm for eurobonds during a visit to Germany yesterday after being warned off the subject by Angela Merkel. The German Chancellor told him she had gone to bed at 4am on Thursday, having blocked French President François Hollande's eurobond plans. "I think I was quite successful in that," she is reported to have told Mr Clegg. According to insiders, the Deputy Prime Minister was left in no doubt that eurobonds were not up for discussion.