British economy slips back into recession

LONDON—BRITAIN has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far.

The report of an unexpected 0.2 percent decline in economic output during the first quarter of 2012 provoked an outcry in Britain, and came on the same day that Mario Draghi, the president of the European Central Bank, shifted his rhetoric on the debt crisis to put more emphasis on growth.

Draghi called for a “growth compact” and a reexamination of where the euro is headed.

“We need to actively step up our reflections about the longer-term vision for Europe as we have done in the past at other defining moments in the history of our union,” Draghi told members of the European Parliament in Brussels.

Yet, amid growing popular unrest, Draghi rejected calls for more deficit spending. The way to restore growth is to make economies more efficient, he said.

“We have to persevere,” he added.

Britain is now in its second recession in three years. The last time the country experienced a double-dip recession was when Margaret Thatcher was elected leader of the opposition Conservative Party in 1975.

In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Edward S. Miliband, head of the opposition Labor Party, who called the economic numbers “catastrophic.”

The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the ECB and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.

The discontent was on view in French elections last week- end and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis.

Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.

Except for Germany, most European countries do not have the financial leeway to pump up their economies with public works projects or other government spending, economists say. Leaders are groping for ways to encourage growth with the limited means at their disposal.

Draghi acknowledged Wednesday that such changes were difficult for the citizens affected.

Economic reforms “change profoundly the societies in which we live,” he said. “This is a source of pain.”

He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Draghi said, without naming any individuals.

Draghi’s plea for beleaguered Europeans to stay the course came as the central bank released a survey of banks that showed a sharp decline in demand for credit by borrowers, which analysts said was further evidence that the euro zone is in recession.

In Britain, some economists had predicted a small increase in first-quarter gross domestic product after recent surveys had indicated that the economy was recovering, although very slowly. Cameron’s government had pointed to the recovery as a sign that the austerity measures it implemented were working.

“It’s too early to call for a reversal of government policy,” said Azad Zangana, an economist at Schroders. But he added, “These latest results do highlight that the economy will not withstand any further acceleration in cuts.”

The British gross domestic product numbers caused bewilderment among some economists, including Andrew Goodwin of Ernst & Young’s economic forecasting unit, the Item Club.

“Our reaction to these figures is one of disbelief,” Goodwin said. “I would be very surprised if these figures were not revised upwards.”

Even if the figures are later revised, they could have a negative effect on consumer sentiment and corporate spending, said Howard Archer, an economist at IHS Global Insight. The report could “hit consumer and business hard and make sustainable growth harder to achieve.”

Output in the British construction sector fell 3 percent in the first quarter while output from production industries fell 0.4 percent, the government statistics office said Wednesday. Manufacturing shrank 0.1 percent and the services sector grew 0.1 percent.

In Parliament, Cameron conceded that “these are very, very disappointing figures” and that Britain was in a “very tough situation that frankly just got tougher.”

Cameron’s government, a coalition of the Conservatives and Liberal Democrats, has been losing ground to Labor in recent opinion polls as voters have become disillusioned with the economic outlook and the austerity plan.

But Cameron said the government would stick to its plan to eliminate most of the budget deficit by 2017.

“More debt and more spending is what got us into this problem,” Cameron said. “It can’t be the solution of the problem.”

Draghi took a similar line, saying countries with a record of deficit spending have not seen benefits. On the contrary, their economies have “flatlined,” he said.

“If one thinks you can increase demand by increasing deficits,” he said, without naming any countries, “then how come we don’t have higher demand?”

As Draghi spoke, the ECB released its quarterly survey of bank lending, which offered probably the best data yet on the effect of the inexpensive, three-year loans that the central bank issued to commercial banks in recent months.