Euro crisis dims recovery hopes

FEARS of a triple- dip recession eased yesterday as George Osborne took to the airwaves to insist his Budget will drive an economic recovery. The Chancellor said the Government was ‘slowly but surely fixing our country’s economic problems’ but conceded progress was slow.

It came as a rare flurry of positive economic news bolstered hopes that Britain will avoid another recession this year – the third i n quick succession.

Optimists even suggested that the bleak forecasts published in the Budget on Wednesday were too pessimistic. But the deepening malaise in the eurozone – where the recession appeared to have deepened even before the crisis in Cyprus erupted – served as a reminder that any recovery will be fragile.

‘Progress is not as fast as I would have liked but the weather has got worse,’ said Osborne.

‘It is a very tough economic situation out there, not just in the UK but in the whole world.’

The Office for National Statistics said the Government borrowed £2.8bn last month – some £9bn less than in February last year.

The fall was in part due to the Treasury receiving £2.3bn from the sale of the 4G spectrum and a £2.7bn cash transfer from the Bank of England.

But the underlying figure was still lower than expected and came as some relief after the Office for Budget Responsibility’s dismal forecasts in the Budget. The OBR said the deficit reduction programme has stalled and any reduction in borrowing this year and next will be ‘fiscally and statistically insignificant’.

The Treasury watchdog also slashed in half growth forecasts for this year to 0.6pc in a further setback to the Chancellor.

But it said Britain will avoid a triple-dip recession – albeit only just – with growth of 0.1pc in the first quarter of 2013 following the 0.3pc slump at the end of last year.

The Bank of England said there was still a 50-50 chance of another slump but a strong rise in retail sales and growing confidence among British manufacturers raised hopes that the OBR is right.

The ONS said retail sales jumped 2.1pc last month – the biggest rise since March last year – and were 2.6pc higher than a year ago.

It marked a strong recovery from a snowy January on the High Street and was driven by demand for tablet computers, sports kit and jewellery. And in a further boost, a survey by the CBI showed British manufacturers at their most confi- dent for nearly a year. ‘Manufacturers appear more optimistic about the next few months than the official figures and commentary would suggest, with sharp rises in output expected right across the sector,’ said CBI economist Stephen Gifford.

Alex Breese, head of UK equities at fund manager Neptune, said: ‘In many ways the Budget was very much in line with our expectations, hardly surprising given the poor hand that the Chancellor had to play. The Chancellor is clearly set on sticking to Plan A, resisting opposition calls to borrow more to boost growth.

‘We believe that with the combination of the measures announced and the improving employment outlook, and more importantly the positive impact of the Funding for Lending Scheme starting to come through as the year progresses, the UK economy may well beat downgraded consensus forecasts and surprise on the upside.’

Chris Williamson, chief economist at Markit, said: ‘The risk of the UK sliding into a triple- dip recession has fallen sharply following news of a rebound in retail sales, rising tax revenues and an improved outlook in manufacturing, confirming the view of the OBR that a renewed recession will be avoided.’

Howard Archer, chief UK economist at IHS Global Insight, said: ‘An all too rare good day for the UK economy with the CBI survey pointing to a much-needed pickup in manufacturing output in the second quarter, retail sales jumping in February, and the public finances showing improvement. Three swallows, but I wouldn’t bet yet on a decent summer.’

But a deepening of the crisis in the single currency bloc cast a shadow across the whole of Europe – and brought into sharp focus Osborne’s Budget warning that ‘another bout of economic storms in the eurozone would hit Britain’s economic fortunes hard’.

The purchasing managers’ index of output in the eurozone – where anything below 50 represents decline – fell to 46.5 this month from 47.9 in February.

Germany managed to keep its head above water, eking out modest growth, but output in France sank to a four-year low.

‘It’s really quite disappointing,’ said Williamson. ‘Given the deterioration in the political and financial market outlook there is really little hope from what we see that there is going to be a turnaround in the second quarter, and in fact more likely an increased weakening.’