Fears grow that cuts will kill recovery

George Osborne

The Chancellor will face more tough questions over the 81 billion of cuts laid out in last week's spending review as GDP is expected to have slowed to around 0.4 per cent in the third quarter from 1.2 per cent in the previous three months.

The figures are likely to trigger further fear over a double dip recession as the UK economy staged a significant slowdown even before the effects of the spending axe kick in.

Initial forecasts for the closing three months of the year point to similarly lacklustre growth of 0.4 per cent. But the real fears are for the first quarter of 2011 when the full pain of the coalition government's cuts are expected to be reflected in GDP output.

A number of economists have recently downgraded their growth expectations for the first three months of next year and concerns are mounting that output could turn negative in the first quarter of 2011.

If GDP growth doesn't recover in the second quarter, Britain will officially find itself in a double dip as two consecutive quarters of negative output qualify as a recession.

But Philip Shaw, economist at Investec Securities, said there was no need for panic just yet. "While we no way find ourselves in the 'double dip' school of thought, we are of the view that the prospect of spending cuts and the uncertainties of the international economy are making it difficult for the UK to establish proper momentum," he said.

Howard Archer, chief UK and European economist at IHS Global Insight, said Tuesday's figures will be compared against unexpectedly high growth in the second quarter when the economy expanded at its fastest pace for nine years. He said markets are likely to have factored in the fact that the shock 1.2 per cent growth in the second quarter was "unsustainable".

The second quarter surge was sparked by record-breaking growth from the construction industry which enjoyed a rebound after a long period of lacklustre performance.

But a number of key surveys over the past three months have pointed to slowdowns in a number of sectors.

Archer said there is no getting away from evidence that consumer confidence is at worrying lows following last week's depressing news on public spending.

"Latest data and surveys are expected to show that the consumer is under serious pressure. In addition, further evidence of housing market weakness is expected to emerge," Archer said.

This week's figures from the Office for National Statistics will also strengthen the case for further monetary stimulus from the Bank of England through its quantitative easing programme.