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Blame game begins as Britain edges closer to another recession

David Cameron says there is ‘not an ounce of complacency’ in government after 0.2% decline in UK’s economic output

Britain moved closer to its second recession in three years after official figures showed the UK economy contracted by more than expected in the last three months of 2011.

A severe drop in manufacturing and construction output in the runup to Christmas dented hopes the UK could avoid joining much of Europe in a slump expected to push up unemployment and see thousands of companies go bankrupt.

David Cameron said there was “not an ounce of complacency” as the government sought to get Britain back on track, but he admitted the 0.2% decline in output was disappointing and would make the job harder over the coming months.

He told MPs at prime minister’s questions that most of the blame should be pinned on the “overhang of debt and deficit” from Labour, an unexpected rise in inflation and the crisis in the eurozone.

In advance of his appearance on Thursday at the World Economic Forum in Davos, Cameron urged world leaders to stop tinkering and drifting, and take bold action to boost competitiveness and increase world trade.

He warned Europe it could not go on promoting “unnecessary measures that impose burdens on businesses and governments, that can destroy jobs”.

He said: “Europe’s lack of competitiveness remains its achilles heel. For all the talk, the Lisbon strategy has failed to deliver the structural reforms we need.”

George Osborne said the government would not change its fiscal plans, adding that Britain’s economic problems were being made worse by the situation in the eurozone. “I think we’ve got the right plan, we’ve got to stick to it,” he said.

He conceded the recovery would be bumpy and include periods of negative growth. But he is expected to come under intense pressure in parliament ahead of his budget in March to explain how he intends to foster confidence in the business community and kickstart growth.

Ed Balls, the shadow chancellor, blamed Osborne for putting the economy into reverse. He said: “Far from the eurozone crisis being to blame, it is only rising exports that kept us out of recession last year. By clobbering the economy with spending cuts and tax rises that go too far and too fast, the government has left us badly exposed if the eurozone crisis deepens this year.”

The TUC s leader Brendan Barber added: “The grand austerity plan is failing to tackle the deficit, causing unemployment to spiral out of control, and is dragging the country back towards recession.”

The Treasury has faced a barrage of criticism from opposition MPs and business leaders that it has failed to put forward a growth strategy to support businesses and keep the economy from falling back into recession – defined as two consecutive quarters of negative growth.

Lord Oakeshott, a former Liberal Democrat Treasury spokesman, said the government needed to act to spur lending to small and medium-sized businesses. “Our economy won’t grow while our biggest bank, RBS, won’t lend. Starving sound small businesses of vital working capital is a recipe for recession,” he said.

A spate of shop closures after Christmas and a collapse in consumer confidence is expected to propel unemployment to new heights in the spring.

Capital Economics, a leading firm of economic analysts, said it was likely the UK was already in recession.

The prospect of a recession into the spring reinforced expectations that the Bank of England will inject more stimulus into the economy next month. The governor, Mervyn King, who has warned of an arduous recovery ahead, hinted the Bank may extend its programme of quantitative easing that has already pumped £275bn into the financial system.

Figures from the British Bankers Association underscored the government’s difficulties after revealing revealed a further contraction in bank lending to the manufacturing and construction sectors. The 0.2% fall in gross domestic product during the final quarter of 2011 came after the economy grew by 0.6% in the third quarter of 2011. The result, which was worse than economists’ forecasts for a 0.1% contraction, means the economy has flatlined since the autumn of 2010.

The industrial sector suffered a especially tough quarter, with the Office for National Statistics reporting that factory output dropped by 0.9%. Activity in the construction industry fell, by 0.5%, while the dominant services sector was flat.

The ONS figures also showed a bigger fall than expected by the Bank of England and the independent Office for Budget Responsibility, which assesses whether the government’s fiscal plans are sustainable.

Economists are generally split as to whether the economy will continue to contract in early 2012, but all stress that any decline will be modest compared to the record 7.1% fall in output in the last recession in 2008-9.

Ian Kernohan, economist at Royal London Asset Management, said: “The economy seems close to stall speed, although during any fragile recovery from a major financial crisis, this is not a huge surprise.” For 2011 as a whole, GDP expanded by 0.9%, less than half the pace in 2010.

Compared with the previous year, fourth-quarter output was 0.8% higher, flattered by a sharp fall in output in the year-ago quarter due to heavy snow.

Output in the services sector, which accounts for three quarters of GDP, was flat on the quarter, its weakest outturn since the final quarter of 2010. The effect of a 0.4% rise in government and other services was cancelled out by a 0.5% decline in the distribution, hotels and restaurants sector, which includes retail.

The downturn in the UK follows a 0.25% decline in German GDP and the prospect of falls in France and Italy over the winter months. Spain has already entered recession and several other EU nations are expected to follow suit.

A slowdown in continental economies and the continued deleveraging by businesses and households as they pay back their debts is expected to intensify efforts to protect spiralling debts in Greece, Portugal, Ireland and Spain from damaging the eurozone recovery. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds