Recession risk as UK’s economy gets worse

The Prime Minister said the 0.2 per cent contraction between October and December showed that the country was facing “extremely difficult economic times”, while economists warned the decline could be followed by further contraction in the current quarter.

Two quarters of negative growth would officially mark the start of a recession.

The Office for National Statistics’ first estimate for the figure marks the first time the UK’s gross domestic product (GDP) has fallen since the final quarter of 2010 when the Arctic weather was blamed for a 0.5 per cent drop. The City had predicted a decline of 0.1 per cent.

Mr Cameron said: “These are extremely difficult economic times. These are disappointing figures, they are not unexpected figures.”

He added that they reflected the “overhang” of debt run up under the previous government, high food and commodity prices, and the eurozone crisis.

But both the Prime Minister and Chancellor George Osborne confirmed the Government would stick by the austerity measures brought in to tackle the deficit, despite the threat of recession.

Mr Osborne said: “Britain has substantial debts. If we don’t deal with those debts, our problems will be worse.”

The GDP figures follow Tuesday’s news that the International Monetary Fund has downgraded the UK growth forecast for 2012 from 1.6 per cent to 0.6 per cent.

Bank of England governor Sir Mervyn King said the UK economy faces an “arduous, long and uneven” road to recovery. The Bank is looking increasingly likely to inject billions of pounds into the UK economy through quantitative easing in February.

During Prime Minister’s Questions, Labour leader Ed Miliband accused the Prime Minister and Chancellor of “smug complacency”.

He said: “What has characterised the Government’s approach throughout this period? Total arrogance.

“How bad do things have to get in our economy to shake you out of your complacency? You and your Chancellor are but the byword for self-satisfied, smug complacency and that is the reality.”

The contraction was driven by a 0.9 per cent fall in manufacturing, a 4.1 per cent drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5 per cent fall in the construction sector.