Warning that coming uptick in economy faces new threat

ECONOMISTS are predicting a pick-up in growth during the second quarter but warned that a further fall in household expenditure will lead to a "double dip" recession in consumer spending.

Official figures released yesterday - following a delay caused by concerns over the quality of the data - showed that the UK's record recession was even deeper than previously thought.

Britain's economy contracted by 6.4 per cent between the second quarter of 2008 and the third quarter of 2009, more than the 6.2 per cent previously estimated.

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The resulting fall was the biggest since quarterly records began in 1955 and wiped a total 22 billion off the economy.

The Office for National Statistics (ONS) left its earlier estimate of 2010 first-quarter gross domestic product (GDP) growth unrevised at 0.3 per cent, giving an unchanged annual decline of 0.2 per cent.

A fall in household spending shown in the latest economic figures is a potential foretaste of the pain to come for stretched family budgets as tax hikes and spending cuts kick in.

Vicky Redwood, senior UK economist at Capital Economics, warned: "Next year is when it will really start to hurt, with a VAT rise to 20 per cent, national insurance going up, benefit cuts as well as public-sector pay freezes and job losses."

Falling consumer spending would add to concerns about the wider economy, which is struggling to pick up growth following the recession.

Economists forecast growth of up to 0.6 per cent in the second quarter, but data released by the ONS showed that output from the key services sector - which makes up almost three-quarters of the UK economy - contracted by 0.3 per cent in April, the biggest fall since January.

Figures released yesterday by the Bank of Scotland showed that there had been a "near stagnation" in service-sector activity compared with better fortunes in the industrial sector.

Steve Graham, director of the Scottish Manufacturing Advisory Service, said: "We are seeing continued resilience in manufacturing in Scotland, with a third consecutive quarter of positive growth.

"We see this in a wide-number of industry sectors."

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James Knightley, economist at ING, warned: "Sterling's depreciation has failed to boost UK economic activity.

With fiscal austerity being stepped up, and consumer spending growth still falling, there is significant reason for concern over growth."

The ONS figures suggest a major rebound in British exports will be needed to maintain growth after planned UK government spending cuts.

But data released on Friday showed the UK's trade gap with the rest of the world unexpectedly hit its widest level since July 2008, with a rise in exports swamped by increasing imports.

The pound fell further against the euro and the dollar after the latest figures were released, while gilt futures pared losses as traders took the view that the data made a Bank of England interest rate rise more distant.

Howard Archer, chief UK economist at IHS Global Insight, said: "While growth likely picked up in the second quarter, we fear it will find it hard to sustain this improvement in the second half of the year.

"We suspect growth will be bumpy and gradual over the coming months in the face of serious headwinds, including major fiscal tightening starting to impact, the problems in the eurozone and serious constraints on consumers."x