Britain back in recession

On Wednesday, the Office for National Statistics (ONS) confirmed a 0.2 per cent decline in gross domestic product (GDP) for the first quarter of 2012.

The drop was driven by the biggest fall in in construction output for three years, while the manufacturing sector failed to return to growth, the ONS said.

Coming after a 0.3 per cent contraction in growth in the last three months of 2011, the decline means that Britain is now in what is technically defined as a recession – or two quarters of negative growth.

Read more: does news of the recession mean more cuts?

The shrinkage in the economy defied expectations by many economists who expected a small rise in output of 0.1 per cent in line with forecasts from the Office for Budget Responsibility (OBR), whose figures are used by the government.

Chancellor George Osborne told Channel 4 News: “They’re very disappointing figures, I don’t disguise that or run away from that at all. Britain faces a very tough economic situation – we’ve got these enormous debts we built up in the good years that we’ve got to pay. We’ve got an unbalanced economy that needs balancing.

“Of course, I would like to see more growth, there is no-one in Britain who wouldn’t like to see more growth. I think the path we have set out is the route to that growth.”

But he denied that his fiscal policy is not working.

“I’m saying one of the reasons that Britain has found it more diifficult to recover is precisely because we had a deeper recession than France or America, we’ve had the biggest financial crisis in our history and the biggest bank bailout in the world.

Speaking at Prime Minister’s Questions, David Cameron said: “I don’t seek to excuse these figures. I don’t seek to explain them away. And let me be absolutely clear, there is no complacency at all in this government in dealing with what is a very tough situation, that frankly has just got tougher.”

The industrial production sector declined 0.4%, with manufacturing down 0.1 per cent after a 0.7 per cent decline in the previous quarter.

The services sector, which accounts for some three-quarters of the economy, saw growth of 0.1 per cent in the quarter, after a decline of 0.1 per cent in the final quarter of 2011.

Terrible news for the government

The big picture is that it's terrible news for the government, on top of everything else, blogs Channel 4 News Economics Editor Faisal Islam. They point to the eurozone and the fact that Holland and the Czech Republic are also in recession, and restate the notion that borrowing more would make the problem even worse.

But just a few days after George Osborne told me that the austerity argument had been "completely won", these numbers will surely reopen the debate about this government's economic policy.

Read more from Faisal Islam's blog.

Damage

The British Chambers of Commerce (BCC) said a decline could damage business confidence.

BCC director general John Longworth said: “A negative first quarter figure, however small, will mean the economy has entered a technical recession and this could affect the sentiment among businesses.”

The Paris-based Organisation for Economic Co-operation and Development predicted a small decline, as have several British forecasters.

The OBR had forecast growth of 0.8 per cent in 2012, whereas Capital Economics expected a contraction of 0.5 per cent.

Britain was last in recession in 2008-09, when the economy shrank by 7 per cent, with 15 consecutive months of declining output. Now recession has returned, it is not expected to be as deep: a shallow decline is more likely.

But there are fears that the extra bank holiday for the Queen’s diamond jubilee will affect growth in the second quarter, while the impact of the Olympics is difficult to judge.

Eurozone

It is also feared the situation in the eurozone could inflict further economic damage on the country, as Chancellor George Osborne has warned.

Eurozone countries, led by Germany, have agreed big cuts in spending to reduce their budget deficits. But the Dutch government collapsed on Monday over its cuts programme.

Francois Hollande, favourite to win the French presidency, has said he will seek to renegotiate the so-called “fiscal compact” agreed with Germany.

This is designed to make it harder for countries to build up big budget deficits and is also meant to reassure the financial markets that the eurozone is serious about reducing debt.