UK consumers are back in recession, ONS data shows

Clear evidence of the squeeze on families emerged from the Office for National Statistics (ONS) in its second estimate of GDP growth for the first three months of 2011.

Although the headline growth figure was unchanged at 0.5pc, new data showed that household spending contracted by 0.6pc following a 0.3pc fall in the final quarter of 2010.

Raising further concerns about the strength of the recovery, business investment shrank by 7.1pc in the quarter, despite the record £71bn cash pile that companies are sitting on. It is now 3.2pc lower than last year. The Government has identified business investment as one of its two pillars for growth – the other being trade.

HSBC economist Andrew Grantham said household expenditure data placed "the UK consumer technically back in recession" while Amit Kara of UBS noted consumption has now "made a negative contribution to GDP growth for the year as a whole". The last time the consumer was so weak was during the recession, in the second quarter of 2009.

The poor data came as the Organisation for Economic Co-operation and Development (OECD), a leading think-tank, cut its growth outlook for this year from 1.5pc to 1.4pc and from 2pc to 1.8pc for 2012, saying that "above target inflation, driven by tax increases and commodity prices, and needed fiscal consolidation, will hold back private consumption and public spending".

UK growth now lags the stricken eurozone, which is forecast to manage 2pc a year for 2011 and 2012, following the OECD's third downgrade in six months.

Economists also warned the underlying weaknesses in the GDP figures pointed to significantly slower growth this year than the 1.7pc official forecast produced by the Office for Budget Responsibility.

Graeme Leach, chief economist at the Institute of Directors, said: "With domestic demand, consumer spending and business investment down in the first quarter, net trade is the only area of growth, but that is unsustainable. GDP growth this year could well undershoot the IoD's already pessimistic forecast of 1.2pc."

The data also appeared to kill off speculation of an early interest rate rise. George Buckley, chief UK economist at Deutsche Bank, has pushed back his first estimate for a rise to 0.75pc from August to November.

Treasury sources claimed the economic rebalancing remained on track as the growth was driven by manufacturing and trade.

The ONS's second GDP estimate, made with about two-thirds of the final data, showed that "net exports accounted for all of the growth in the first quarter and most over the last year", Simon Ward at Henderson noted. Exports rose by 3.7pc, nearly double consensus expectations, while imports dropped by more than 2pc.