24/05/2012 05:35 BST | Updated 24/05/2012 09:20 BST

UK Economy: GDP Shrinks By 0.3% As Figures Show Double Dip Recession Worse Than Thought

The double-dip recession is deeper than originally feared as revised figures showed a sharper decline in the economy in the first three months of the year on Thursday.

Gross domestic product (GDP) shrank by 0.3% between January and March, the Office for National Statistics (ONS) said, down from an initial estimate of 0.2%.

The news will put pressure on chancellor George Osborne, after a week in which the head of the International Monetary Fund (IMF) said he should consider a new approach to the economy with an increased focus on public investment.

george osborne

Osborne is facing increasing pressure to get the economy moving

Christine Lagarde, head of the IMF, said that more quantitative easing and lower interest rates may be needed to boost the economy if growth does not return.

The downward revision will fuel criticism that the chancellor's austerity measures are choking off the recovery.

Labour argues that spending cuts have pushed the country back into recession, while the election of socialist Francois Hollande in France, who promotes investment over austerity, is seen as a wider shift in Europe towards pro-growth policies.

Ed Balls MP, Labour’s shadow chancellor, said after the revised GDP figures were released:

“Our complacent and out of touch prime minister and chancellor have spent the last week claiming their plan is on track, but these figures show that Britain’s double-dip recession is even deeper than first thought.

“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?"

The revised GDP drop was driven by a worse-than-previously estimated performance from the nation's builders, the ONS said, as construction output fell 4.8%, the steepest decline in 11 years.

The second estimate, which could be revised later, means the UK is in a technical recession - defined as two quarters of decline in a row - following a 0.2% fall in the final three months of 2011.

bank of england

Gross domestic product (GDP) shrank by 0.3% between January and March

But Downing Street said it was clear that there would be no change in course.

The Prime Minister's office said that with much of the rest of Europe in recession, it was always going to be difficult for the UK economy to grow.

A spokesman pointed out that while exports of goods to non-EU countries had grown by 4.4% over the period, exports to the EU had fallen by 3.1%.

"What the figure confirms is that it is a very difficult economic situation and we will take time to recover from the biggest financial and debt crisis in our lifetimes," the spokesman said.

"We cannot be immune from what is happening on our doorstep."

TUC general secretary Brendan Barber also criticised the government for "taking our economy in completely the wrong direction."

“Despite ministers’ efforts to blame Europe for everything the truth is many of our problems are home grown, with consumer spending and construction both struggling under the weight of the government’s austerity programme," he said in a statement.

James Knightley, economist at ING, said the high levels of government spending called the Chancellor's austerity measures into question, while Vicky Redwood, chief UK economist at Capital Economics, said government support would not last.

She said: "Of course, the GDP figures could yet be revised back up again in the future.

"But with so many factors holding back the recovery, we still expect the economy to contract by about 0.5% this year as a whole."

The second estimate provides data for the expenditure side of the economy for the first time and revealed a slowdown in household spending, which increased by 0.1% in the first quarter, compared to 0.4% growth in the final quarter of last year.

Radical Ways To Save The Economy

Household spending declined for three quarters in a row last year and has been hit by high inflation, sluggish wage growth and soaring unemployment.

But government spending surged 1.6%, the biggest rise since the first quarter of 2008, driven by spending on health and defence.

The services sector, which accounts for some three-quarters of the economy, saw unrevised growth of 0.1%, after a decline of 0.1% between October and December last year.

The industrial production sector declined at an unrevised 0.4%, with manufacturing flat after a 0.7% decline in the previous quarter.

Howard Archer, chief european economist at IHS Global Insight said the figures were "very disappointing" and added that events in Greece could further hamper the UK's economy.

Archer said the Bank of England will now be under pressure to increase QE: "The deeper than first reported GDP contraction in the first quarter maintains pressure on the Bank of England to enact more Quantitative Easing. It is evident that the MPC will closely review its decision in June and over the coming months in light of whether or not the economy shows evidence of underlying improvement and how sticky consumer price inflation proves to be," he said in a statement.

"The likelihood is that as things stand the Bank of England will hold fire on QE, but any deterioration in the underlying growth outlook and it will pull the QE trigger again."

Economists and business leaders have warned that a technical recession will hit confidence and could cause businesses to rein in spending at a time when they are being encouraged to invest to stimulate growth.

But the current downturn is expected to be nothing like as severe as the previous recession of 2008/09, which spanned more than a year.

In another set of data, business investment rose by £1.1 billion, or 4%, to £30.8 billion when compared to the previous quarter.

The rise was driven by investment in electricity, gas and water, and mining and quarrying industries, the ONS said.

IPPR Chief Economist, Tony Dolphin, said in a statement on Thursday it was time for the government to take action, in light of the IMF's warning. “It is too late for contingency planning; it is time for action."

Despite a brief respite for Britons with inflation hitting a 26 month low on Tuesday, gloom over the prospects for the eurozone was underlined by a second international body, the Organisation for Economic Co-operation and Development, which forecast a 0.1% contraction in the 17-nation bloc this year followed by anaemic 0.9% growth in 2013, with Europe falling well behind a resurgent USA.