UK economy shrank more than thought

Jane Foley, Rabobank: "Head-winds from the eurozone are extremely strong"

The UK economy shrank by 0.3% in the first three months of the year, more than previously thought, revised figures have shown.

Last month's initial estimate from the Office for National Statistics (ONS) showed a contraction of 0.2%.

The downward revision was due to a bigger contraction in construction output than previously estimated.

Over the last year and a half, the economy has fluctuated between quarters of growth and contraction.

In the final three months of last year, the economy also shrank by 0.3%, meaning the UK is back in recession.

There are concerns that the UK economy will shrink again in the second quarter of the year - the governor of the Bank of the England Mervyn King has warned that the Queen's Diamond Jubilee could reduce output.

Following the revised figures, shadow chancellor Ed Balls described Prime Minister David Cameron and Chancellor George Osborne as "complacent and out of touch".

"It's now clear that this is a recession made in Downing Street by this government's failed policies," he said.

"Despite all the problems in the euro area, France, Germany and the eurozone as a whole have so far avoided recession and only exports to other countries stopped us going into recession a year ago. The result is that Britain is now in a weaker position if things get worse in the eurozone in the coming months."

Government spending

The revised figures for the first quarter showed that output in the construction industry fell by 4.8% compared with the initial estimate of 3%.

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An increase in government spending of 1.6% - the biggest rise since the first quarter of 2008 - went some way to offsetting this contraction. This was driven largely by spending on health and defence.

The figures also showed unchanged growth in the service sector of 0.1%, while household spending increased by the same amount.

Compared with the previous year as opposed to the previous quarter, growth fell by 0.1%, the first annual drop since the final three months of 2009.

The first quarter's growth figure will be revised again next month.

When the first estimate of the GDP figures was released last month, a number of commentators expressed surprise at the data, and some still argue that the latest figure does not accurately reflect the performance of the UK economy.

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"Our reading is the construction sector was not as weak as the official data suggests, implying that overall the economy performed better than today's release shows," said Philip Shaw at Investec.

"Nonetheless, the economy is not recovering properly and with the uncertainty over Europe hanging over the outlook as well, our suspicion is the Monetary Policy Committee [of the Bank of England] will sanction further quantitative easing (QE) at some point later on this year."

The Bank has already pumped £325bn into the UK economy through its QE programme to try to boost growth, but has said it is open to the idea of further cash injections.

Earlier this week, the head of the International Monetary Fund, Christine Lagarde, said that if the economic recovery continues to falter, the UK should consider more QE. She also suggested the Bank could cut interest rates below the current record low of 0.5%.

She did, however, back the government's austerity drive designed to cut the UK's budget deficit.

A number of observers argue that the coalition's spending cuts have played a large part in the UK's return to recession. In recent weeks, there have been growing calls across Europe for a greater focus on growth, as opposed to austerity, to help drive the economic recovery and reduce debt levels.

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