UK slides back into recession

The unexpected contraction in the first three months of 2012 - a 0.2 percent dip in gross domestic product - confounded forecasts for 0.1 percent growth.

It came as Britain's Conservative-Liberal Democrat coalition has seen its support slide in opinion polls following weeks of fierce criticism for unpopular tax measures in last month's budget. Local elections, a big test, are on May 3.

The government is also under fire over revelations about its close relationship with media tycoon Rupert Murdoch.

The Office for National Statistics said Britain's gross domestic product fell 0.2 percent in the first quarter of 2012 after contracting by 0.3 percent at the end of 2011.

Most economists had expected Britain's economy to eke out modest growth in early 2012, but these forecasts were upset by the biggest fall in construction output in three years coupled with anaemic service sector growth and a fall in industrial output.

The government desperately needs growth to achieve its overriding goal of eliminating Britain's large budget deficit over the next five years. But this will be a challenge as many of Britain's euro zone trading partners are already in recession.

The figures will also be a conundrum for the Bank of England, which had appeared poised to end its second round of quantitative easing gilt purchases due to survey evidence that the underlying economy was strengthening.

Today's figures confirm that there is a genuine debate to be had on whether the committee needs to sanction more QE, said Investec economist Philip Shaw.

The Chancellor (George Osborne) has very little room on the public finances and at this stage any attempt for a fiscal revival would be probably taken very badly by markets, he said.

Gilt prices rallied and sterling fell more than half a cent against the dollar after the data.

Cameron has had a torrid time since his government's annual budget last month was attacked for cutting taxes at the top end of the income scale while taking from pensioners.

Newspapers and allies who once fell over each other to sing his praises now accuse the expensively educated Conservative Party leader of speaking for the few and of vanity globe-trotting as the economy sputters and Britons suffer the harshest state spending cuts for a generation.

Things took a turn for the worse on Tuesday when James Murdoch told an inquiry that Jeremy Hunt, Cameron's culture minister and a close ally, had numerous secret contacts with him and his top London lobbyist ahead of a controversial merger. [ID:nL5E8FOFQP] Rupert Murdoch, James' media mogul father, was answering questions at the inquiry on Wednesday.

STALLED RECOVERY

Britain's economy contracted by 7.1 percent during its 2008-2009 recession and has not fully recovered since, with headwinds from the euro zone debt crisis, government spending cuts, high inflation and a damaged banking sector.

It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime, finance minister Osborne said after the data.

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

Wednesday's data showed that output was still 4.3 percent below its peak in the first quarter of 2008, and the economy has only grown by 0.4 percent since the government came to power in the second quarter of 2010.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by just 0.1 percent in the first quarter after falling 0.1 percent in Q4 2011, kept down by a contraction in the large business services and finance sector.

Industrial output was 0.4 percent lower after a sharp fall in oil and gas extraction, while construction, which accounts for less than 8 percent of GDP, contracted by 3.0 percent, the biggest fall since the first quarter of 2009.

Britain's Office for Budget Responsibility forecasts growth of 0.8 percent this year. Wednesday's data shows that first quarter output was no higher than a year earlier.

The Bank of England has warned that there is a risk of another contraction in the second quarter of 2012, due to an extra public holiday. But unlike during the previous two quarters, it does not appear keen to provide further monetary stimulus through quantitative easing asset purchases, due to above-target inflation which looks stickier than before.

The BoE, and a number of private-sector economists, had argued before Wednesday that the underlying health of Britain's economy was stronger than ONS data suggested, due to relatively upbeat private-sector surveys and a fall in unemployment.

The ONS's preliminary estimates of GDP are the first released in the European Union, and are based partly on estimated data. On average, they are revised by 0.1 percentage points up or down by the time a second revision is published two months later, but bigger moves are not uncommon.

(Reporting by David Milliken and Fiona Shaikh; editing by Sven Egenter/Jeremy Gaunt)