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PM Cameron 'will stick to strategy' as UK slips into recession

Downing Street has ruled out any change in economic policy as official figures revealed a 0.2% contraction in the UK economy.

The decline in gross domestic product (GDP) was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth, the Office for National Statistics (ONS) said.

Prime Minister David Cameron's official spokesman said: "These are clearly very difficult economic times.

"The figures out this morning are disappointing but it is taking longer to recover, partly because we have suffered from the biggest debt crisis in our lifetime and partly because of what is happening elsewhere in the world, and in particular in Europe.

"The one thing that would make the situation even worse would be to abandon our plan and deliberately add more borrowing and add to debt.

"What is happening in the eurozone clearly has an impact on our economy. Partly that is through trade - it is a very big market for the UK and UK businesses. But it has a wider impact. As the Prime Minister has said before, what happens in the eurozone has had a chilling effect on our economy here.

"Already there are a number of eurozone countries in recession - Italy, Holland, Ireland, Belgium, Portugal, the Czech Republic, Denmark, Slovenia and Greece.

"It is an extremely difficult economic time, but our plan to reduce the deficit is the right plan and means that we have got interest rates at record lows, which means that mortgages and loans are cheaper and that supports recovery.

"We are sticking to our plan."

The ONS's first estimate is done before more than half of the data has been gathered and some economists are hopeful that today's figure will be revised higher in coming months.

But economists warn that the economy will continue to struggle amid stubbornly high inflation and rising unemployment, while confidence and exports will be hampered by the eurozone debt crisis.

There are fears that the extra bank holiday for the Queen's Diamond Jubilee will hit the current quarter, and it is not known what impact the Olympics will have in the summer.

Vicky Redwood, chief UK economist at Capital Economics, said even without the fall in construction, "output would have done no better than stagnate" and forecast that GDP will contract by about 0.5% this year.

She said: "The main disappointment was the meagre 0.1% rise in services output - the surveys had pointed to services growth of 0.5% or more.

"Even if the underlying picture is stronger than the official GDP figures show, there is no guarantee that the recent pick-up will continue."

Bank of England governor Sir Mervyn King recently warned that the economy might "zig-zag" in coming months.

The preliminary ONS estimate means the UK is back in a technical recession - defined as two quarters of decline in a row.

The City had predicted the economy would scrape growth of 0.1% after a 0.3% fall in the previous quarter.

But the current downturn is expected to be nothing like as severe as the previous recession of 2008/09, which spanned more than a year.

The return to recession will heap more pressure on the Government and fuel criticism that Chancellor George Osborne's austerity measures are choking off the recovery.

Economists and business leaders have warned that a technical recession would hit confidence and could cause businesses to rein in spending at a time when they are being encouraged to invest to stimulate growth.

Mr Osborne said: "It's a very tough economic situation. It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime - even after the recent fall in unemployment.

"But over many years this country built up massive debts, which we are having to pay off."

He added that the recession in much of the rest of Europe was hampering the recovery, but pledged not to abandon his "credible plan" to cut the budget deficit.

The services sector, which accounts for some three-quarters of the economy, saw growth of 0.1% in the quarter, after a decline of 0.1% in the final quarter of 2011.

Retail sales were boosted last month by panic-buying of petrol amid fears of a tanker drivers' strike and a heatwave encouraged people to buy summer clothes.

But the industrial production sector declined 0.4%, with manufacturing down 0.1% after a 0.7% decline in the previous quarter.

The continued fall in manufacturing will come as a blow to the Government, which is hoping the sector will lead the recovery.

The construction sector was the biggest contributor to the decline in GDP, with a 3% fall in the quarter, its biggest contraction since the first quarter of 2009.

But economists have said the ONS's reading of the economy may be too gloomy, as recent industry surveys for both the manufacturing and construction sectors have pointed to growth.

Chris Williamson, chief economist at Markit, said: "The underlying strength of the economy is probably much more robust than these data suggest.

"The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession."

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