Gordon Brown was last night facing the prospect of going into this year's general election with Britain's economy back in recession.
The spectre of such a "double dip" downturn was being discussed as a realistic possibility after official figures showed that Britain's economy was barely in positive territory in the fourth quarter of last year.
The Office for National Statistics said growth came in at a torpid 0.1 per cent – officially signalling the end of the worst recession since the Second World War but well below the City's expected figure of 0.4 per cent.
Ministers are nervous that the initial figures for the first quarter of this year could show the economy slipping back into negative growth due to the withdrawal of the Government's fiscal stimulus programme and the need for household debt to be repaid. They will be published on 23 April, just two weeks before the expected election date of 6 May.
"If it happens, we will just have to take it on the chin," one senior Labour figure said last night.
Treasury sources said yesterday's 0.1 per cent growth figure might be revised upwards on the back of stronger retail sales in December than forecast. But they admitted that this month's return to a VAT rate of 17.5 per cent and the bad weather – hitting retail sales and construction – could act as a brake on growth.
Joe Grice, the ONS chief economist, also warned that the figures could just as easily be revised down as up as more figures come in, noting that such revisions are usually of the order of 0.1 per cent or 0.2 per cent. Yesterday's growth figure is based on just 40 per cent of the returns.
Mr Darling admitted that economic conditions would still be "painful" for many people in the coming months. He said the "modest" growth figure exposed as "utter folly" the Tories' call for "drastic cuts in public spending" this year, warning that this would risk derailing the recovery.
George Osborne, the shadow Chancellor, said: "These very weak growth figures show that Gordon Brown's government left us badly prepared for the recession and badly prepared for the recovery."
Vince Cable, Treasury spokesman for the Liberal Democrats, added: "Far from the quick recovery the Chancellor has been praying for, the economy is only just staggering back into growth. The British economy has had the economic equivalent of a heart attack and is still very weak."
Significantly, much of the growth in the last quarter of 2009 came from the high street, while Mr Grice highlighted the particular strength of the automotive sector. Both of these have been major beneficiaries of government stimulus measures such as the temporary 2.5 per cent cut in VAT – reversed this month. The motor trade came in for particular help from the "cash for clunkers" scrappage scheme which is approaching its end.
The public sector also helped, showing growth of 0.2 per cent, but with post-election spending cuts looming, that is another prop which cannot last. Britain's huge banking industry remains mired in recession.
City economists still believe that the economy will continue to grow in the current quarter, despite the gradual unwinding of stimulus measures, and said they expected any revision to the figures would be upwards.
But they admitted that "nothing can be ruled out" after the unprecedented severity of the downturn which saw the economy contracting by 4.8 per cent last year – the worst single-year performance for 88 years. In total Britain has been in recession for six quarters.
A contraction in the current quarter will not technically qualify as a return to recession because that requires two consecutive quarters of negative growth. But a fresh contraction would be disastrous for the Prime Minister, whose stewardship of the economy has faced severe criticism. Britain is the last major world economy to come out of recession, with most of its international competitors returning to growth in the third quarter.
Yesterday's disappointing number caused the pound to fall by over a cent against the dollar at its worst, to a low of $1.60.093, although it recovered later.
The International Monetary Fund has revised up its figure for British GDP growth from 0.9 per cent to 1.3 per cent for 2010, in line with the Treasury's forecast for 1.25 per cent growth this year.
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies