Double dip has arrived – and Osborne is running out of escape routes

Yesterday morning's economic news was even more miserable than the weather, as official statistics showed that, for the second time in less than three years, Britain is back in recession – the long-feared "double dip".

Click HERE to view graphic

The UK economy contracted by 0.2 per cent in the first three months of the year, following a 0.3 per cent contraction in the final quarter of 2011, reported the Office for National Statistics. Two consecutive quarters of falling output meets the definition of a recession.

Lingering hopes that Britain would bounce back to growth this year were washed away by a slump in the construction sector, which fell 3 per cent over the past three months.

Britain's giant services sector, which accounts for three-quarters of the economy, also only managed to post feeble growth of 0.1 per cent.

"It's a very tough situation," said the Chancellor, George Osborne, responding to the figures. "It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime."

He sought to shift some of the blame for the double dip to the eurozone's sovereign debt crisis: "It's made much harder when so much of the rest of Europe is in recession or heading into it." But Britain's exports to Europe have held up surprisingly well in recent years, despite the financial turmoil on the continent.

Latest trade figures even showed a £300m increase in exports to the continent in February, at a time when market nerves about Spain and Italy were creeping back. And last year net trade made a positive contribution to UK GDP.

Many economists and some business associations expressed doubts yesterday about the accuracy of the ONS figures, pointing out that surveys suggested stronger activity over the first quarter.

But even if the ONS had produced a small positive number yesterday, the overall picture would still have been very bleak. Britain is still some 4 per cent below the levels of output of before the 2008 financial crash that sent us into the biggest slump since the Great Depression. Indeed, as the chart shows, the UK actually recovered lost ground at a faster rate in the 1930s.

"We never had a recovery," said Jonathan Portes, director of the National Institute of Economic and Social Research. "We've had five quarters of basically zero growth if you add it all up."

So why is the British economy still flat-lining when other economies around the world, such as the US, are growing?

The Office for Budget Responsibility blamed the UK's feeble economic performance on the global spike in energy prices and the higher-than-expected domestic inflation that resulted. This put a financial squeeze on British households and pushed up businesses' costs.

No one disputes that inflation has played a major role in hammering growth. But an increasing number of economists now argue that the Chancellor's own policies – the most drastic fiscal consolidation since the Second World War – have also helped to undermine the performance of the economy.

Adam Posen, a member of the Bank of England's Monetary Policy Committee, argued last month that the US has grown at a much stronger pace than the UK since 2008, in part because President Barack Obama has closed America's budget deficit at a more moderate pace than the Coalition.

It is not just the pace of the deficit reduction that's worrying some analysts, but the nature of the cuts. While Government current spending (which goes on public-sector wages and welfare) grew last year, Government capital spending (the money used to build new schools, social housing and transport schemes) was slashed by around 13 per cent.

Michael Ankers, chief executive of the Construction Products Association, yesterday placed the blame for the slump in his sector squarely on these government cuts.

The headwinds from Government fiscal tightening are not going to die down. The Treasury's own figures show some 90 per cent of the spending cuts are still to be implemented. For Mr Portes these cuts, particularly in public investment, simply make no economic sense. "We have unemployed people, unemployed construction firms," he said. "The Government is doing precisely the opposite of what any undergraduate macroeconomics textbook would tell you to do."

The shadow Chancellor, Ed Balls, called on the Chancellor to change course. "We consistently warned that their austerity plan was self-defeating and that cutting spending and raising taxes too far and too fast would badly backfire," he said.

But Mr Osborne insisted that slowing the pace of deficit reduction would only make Britain's "tough" predicament worse. "Every business organisation, everyone who looks at the British economy from the rest of the world... and, I think, the British people, understand that's not the right course," he said.

Global view: How the UK's competitors have performed in recent quarters

United States

The decision to stick with stimulating the economy looks to have worked, but the pace of recovery may be cooling.

China

The world's No 2 economic powerhouse is growing at an enviable rate but a slowdown in could risk social unrest.

Japan

After bouncing back from last year's Tsunami and nuclear disaster, Japanese growth has returned to a sluggish pace.

Germany

A strong manufacturing exporting base and the low value of euro means Germany remains strong.

France

The big question for France and its presidential candidates is how quickly to close the fiscal deficit.

Italy

Prime Minister Mario Monti is keen to push through labour market reforms in teeth of a recession.

Spain

Has an 8.5 per cent deficit and 23 per cent unemployment. Central bank has predicted a first-quarter contraction of about 0.4 per cent.

Ireland

Once austerity's poster boy, growth petered out last year as economy foundered amid huge public spending cuts.

Switzerland

Strong Swiss franc has made exports more expensive but curbs on currency have kept the economy in growth.

Canada

Motoring along impressively. Central bank recently raised its 2012 growth estimate to 2.4 per cent.

Brazil

A slowing, resource-rich superstar. Central bank has been cutting rates to boost growth.

India

Another emerging giant that's slowing. Growth forecasts cut for 2012, reduced to 5.3 per cent, down from 6 per cent.