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UK GDP shrank 0.2% in the first three months of 2012, sending Britain into its first double-dip since the 1970s

Britain has sunk back into recession, its first double-dip downturn since the 1970s, piling pressure on the government to soften its austerity drive.

GDP unexpectedly shrank by 0.2% between January and March, following a 0.3% contraction in the fourth quarter of last year, according to the Office for National Statistics. A technical recession is defined as two or more consecutive quarters of economic decline. The figures wrongfooted City economists, who had expected a return to growth, albeit of a meagre 0.1%.

The shock downturn piles further pressure on the government to step up its efforts to boost the economy, and highlights the challenges it faces in reducing Britain's debt from record levels. The fall back into recession will also heighten calls for the chancellor to ease up on his deficit-cutting plans. However, George Osborne stuck to his guns on Wednesday morning.

"It's a very tough economic situation. It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime. 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," said the chancellor.

David Cameron admitted at Prime Minister's Questions that the return to recession was "very, very disappointing". "There is no complacency at all in this government in dealing with what is a very tough situation, which frankly has just got tougher," he said. "It is very difficult recovering from the deepest recession in living memory, accompanied as it was by a debt crisis."

Hitting back, Ed Balls, the Labour shadow chancellor, said: "We consistently warned that their austerity plan was self-defeating and that cutting spending and raising taxes too far and too fast would badly backfire. David Cameron and George Osborne arrogantly and complacently dismissed people who warned of the risk of a double-dip recession and the country is now paying a very heavy price. Their economic credibility is now in tatters."

The UK economy contracted by 7.1% during the 2008-2009 recession, which lasted five quarters in a row. Since then recovery has been slow – the weakest in 100 years, weaker than after the Great Depression, the 1970s oil shock or the recessions of the 1980s and 1990s.

The latest decline was caused by falls in industrial and construction output while Britain's dominant service sector barely grew.

"The UK has sunk back into a recession, if the official first estimate of economic growth in the first quarter is to be believed," said Chris Williamson, chief economist at Markit. "However, the underlying strength of the economy is probably much more robust than this data suggests. The danger is that this gloomy data delivers a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession."

Britain's service industries, which make up more than three-quarters of the economy, grew by just 0.1% in the first quarter, after declining by 0.1% in the fourth quarter of last year. Growth was held back by a drop in output in the business services and finance sector.

Industrial output was 0.4% lower, while construction shrank by 3% – the biggest drop since the start of 2009.

The question is whether the Bank of England will respond by pumping more money into the economy under its quantitative easing (QE) programme, but it is hamstrung by high inflation.

"The biggest surprise – and perhaps the most worrying element of this report was the disappointment in services output," said Alan Clarke at Scotia bank. "Ironically construction, which had the most potential to determine whether or not the UK is in recession, proved much less negative than feared. The Bank [of England] recently highlighted that it cares most about underlying growth. Our gauge of underlying GDP showed zero growth – still very disappointing. The door is back open to more QE, but the elevated inflation outlook is the biggest obstruction."

The GDP figures conflict with other recent data from business surveys, which have painted a steadily improving economic picture.

Economists also question the reliability of the official construction numbers.

The statistics office's chief economist Joe Grice said the bigger picture in Wednesday's GDP data is that the UK economy, in volume terms, was flat between January and March compared with the same period last year. Looking at the UK since last summer, he added that the picture is of "a flattish economy".

Britain is the first major economy to report GDP data for the first quarter of 2012.

 

The storm clouds continue to gather over the British economy. Last week, two ONS data releases gave us insight into where the economy is and, importantly, further indication of what the first estimate of the GDP first-quarter growth rate is likely to be when it is published on April 25.

 

 

 

With awful industrial production figures, rising unemployment and poor retail sales, the numbers – on construction output and net trade – suggest to me there is a better than 50-50 chance that number will be negative. This would imply the UK is already in a technical double-dip recession, which occurs when there are two successive negative quarters of growth. That, rightly, would generate a political storm.

The data on construction showed the sector is likely to be a net drag on growth. Construction output in February was 17 per cent lower than in November and 4.6 per cent less than a year earlier, which was considerably worse than economists had expected. Even though construction accounts for only 8 per cent of the economy, if these numbers are repeated in March they would represent a significant downward pull on GDP growth.

The trade figures were especially shocking. The UK's deficit on seasonally adjusted trade in goods and services rose to £3.4bn in February from £2.5bn in January. Negative net trade also lowers GDP growth. The numbers are presented in the table above.

The deficit on seasonally adjusted trade in goods was £8.8bn in February, compared with £7.9bn in January. Excluding oil and erratic items, the seasonally adjusted volume of exports was 5.3 per cent down and the volume of imports 0.9 per cent lower in February, compared with January.

The deficit increased further in February to £3.4bn. This was driven by a 2 per cent monthly drop in export values while import values edged up by 0.2 per cent. January's deficit was revised down from £1.8bn to £2.5bn, extending the pattern of downward revisions we have seen to almost all recent economic data releases.

Of particular note is that the worsening balance of trade in goods is not principally due to the weakness of the Eurozone, although it almost certainly will be soon. It worsened sharply because of a decline in exports to non-EU countries, from £12.8bn in January to £11.7bn in February. Indeed, the balance of trade in goods to the EU in February was less than a year earlier (-£3.8bn compared with -£4bn). To this point, the government can't really blame its problems on the slowing Eurozone, which is the UK's major export market. It isn't as if it didn't know about the problems in the Eurozone when it launched its reckless austerity programme.

That situation is set to worsen because GDP growth in the Eurozone was -0.3 per cent in Q4 2011 with 12 of the 17 euro area countries having negative growth. Greece is likely to be heading back into recession, and there is little sign of improvement in any of these countries. The OECD forecasts negative growth for the weighted average of the three largest euro countries, France, Italy and Germany, for the last quarter of 2011 and the first one of 2012 – as it is for the UK, which would mean all would be in double-dip recession. As my friend Nouriel Roubini has said: "The trouble is that the Eurozone has an austerity strategy but no growth strategy." Sound familiar? Developments in Spain last week, where bond yields rose to 6 per cent, and in Italy where they also rose, suggest the euro crisis is back and more bailouts are on the way. It is hard to see how net trade is about to make a positive contribution to UK growth.

The table of the latest forecasts from the Office for Budget Responsibility shows the expenditure contributions to growth from the six major components – private consumption, business investment, dwelling investment, government, inventories and net trade. What is clear is that net trade is supposed to contribute half the growth of 0.8 per cent in 2012, which is not going to happen. Plus the OBR believes net trade will make a major contribution in 2013 and to a lesser degree in 2014 and 2015, which seems fanciful. The 10 per cent appreciation of sterling against the euro over the last nine months certainly won't help.

The OBR's past forecasts have been overly optimistic, embarrassingly being revised downwards in every subsequent forecast, and the latest is inevitably going to follow in that tradition. For example, in its June 2010 Budget forecast, the OBR predicted that in 2011 business investment would grow by 8.1 per cent whereas the actual outcome was 0.2 per cent.

The OBR forecasts growth in investment of 6.4 per cent in 2013, 8.9 per cent in 2014 and double digits after that, and consumption growth of 1.3 per cent in 2013 rising to 2.3 per cent in 2014 and 3 per cent after that. Same forecast pushed out a year or so. Wrong then, wrong now. Dream on.

The table makes clear that government cuts are set to become an even bigger drag on growth as we move towards an election, with the deepest in 2015. But never fear, apparently private consumption and investment will pick up in 2013 along with dwellings investment, and growth will accelerate. Even though they didn't in 2011 and don't look like they are going to in 2012. Pigs might fly.

The evidence from the report is that consumer demand is growing "only at a gradual pace" while investment intentions "point to only modest growth in capital spending over the coming year". The EU's Economic Sentiment Index for the UK dipped again in March, driven by a big drop in confidence of retailers, and at 91.4 is well below its level of 102.4 when the coalition took office in May 2010 . So it doesn't look like things are going to get better any time soon. Slasher Osborne's austerity plan is in deep political and economic trouble.

David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee

 

Governments should step in to help struggling households write off part of their mortgages in the wake of a financial crisis to avoid the risk of a prolonged economic slump, according to new research by the International Monetary Fund.

In a chapter of the spring edition of its World Economic Outlook, the rest of which will be published next week, the IMF's economists find that a rapid buildup of household debt during a boom leads to a deeper downturn when the bubble bursts.

"Housing busts preceded by larger run-ups in gross household debt are associated with deeper slumps, weaker recoveries, and more pronounced household deleveraging," they find.

From Iceland to the US, Spain to the UK, a rapid increase in debt was a common characteristic across many economies in the years before 2007, as homeowners took advantage of low interest rates to borrow against the rocketing value of their properties.

When house prices crashed, many borrowers inevitably found themselves in trouble and were forced to cut back sharply, contributing to the deep recessions that followed the financial crisis.

But when they examined scores of historical property crashes, the IMF found that where consumers were battling with a heavy debt burden spending fell on average four times as fast as could be explained by the decline in house prices alone.

"The decline in economic activity is too large to be simply a reflection of a greater fall in house prices. And it is not driven by the occurrence of banking crises alone," they say. "Rather, it is the combination of the house price decline and the pre-bust leverage that seems to explain the severity of the contraction."

Because of this strong relationship between the debt burden before a crisis and consumer behaviour in the years afterwards, the IMF says governments should consider intervening to help households write off or restructure their mortgages.

It details the case of the Home Owners' Loan Corporation, which was introduced by the Roosevelt government during the Great Depression. The HOLC bought 1m distressed mortgages from troubled banks and used the government's firepower to bring down the costs for homeowners – for example by extending the term of the loan. Just a fifth of the mortgages eventually ended in default – 800,000 were paid back.

The IMF suggests recent efforts by the White House to reduce foreclosures have been disappointing by comparison.

The report also praises Iceland's recent efforts to deal with the impossible household debts run up during the housing boom, which included a temporary moratorium on repossessions and a government-backed scheme to allow struggling borrowers to reschedule their payments.

"Bold and well-designed household debt restructuring programmes, such as those implemented in the United States in the 1930s and in Iceland today, can significantly reduce the number of household defaults and disclosures. In so doing, these programmes help prevent self-reinforcing cycles of declining house prices and lower aggregate demand."

The IMF's findings offer fresh support to a warning issued recently by consultancy McKinsey, which suggested that the UK faces a tough struggle to restore growth, because the total debt burden has barely budged since before the crisis.

McKinsey said total debt, including borrowing by companies and the government, as well as households, now exceeds 500% of GDP, barely below the level in Japan, and suggested it would take until 2020 for these legacy debts to be dealt with.

However, other analysts, including Ben Broadbent of the Bank of England's monetary policy committee, have argued that the legacy of debt left over from the boom years should not hold back economic recovery, because it was largely backed by increases in the value of assets such as property. House prices have so far fallen less sharply in the UK than in many other countries.

The OECD, which produces quarterly figures showing year-on-year growth, said that UK output declined by 1.2% in the final quarter of 2011

The UK is deep in recession and will be among the slowest of the world's largest economies to recover in the first half of this year, according to a study by the Paris-based thinktank, the OECD.

Only Italy will struggle over a longer period to return to growth, highlighting the difficult situation contronting the British government as it battles to boost confidence and get the economy back on track.

In recent weeks surveys have shown the business and consumer sentiment falling back after an initial boost earlier this year.

The Office for National Statistics added to the gloomy prognosis for the economy on Wednesday when it reported a bigger fall in output in the final three months of 2011 than first estimated. It said a previous 0.2% drop in output had underestimated the the size of the fall, which further analysis found to be 0.3%.

The OECD, which produces quarterly figures showing year-on-year growth, said that UK output declined by 1.2% in the final quarter of 2011 and will decline by 0.4% in the first three months of 2012.

The OECD also warned the recovery for the world's biggest economies would be fragile, with the outlook for Europe "very weak".

Europe is crashing back into recession as storm clouds gather over the region's twin economic powerhouses, Germany and France, experts have warned.

The latest evidence of the eurozone's woes comes less than 24 hours after the Office for Budget Responsibility slashed its forecasts for the region, predicting a 0.3 per cent decline this year for the UK's biggest export market. The Government's independent watchdog says an intensifying debt crisis in Europe and soaring oil prices are the biggest threats to the UK's recovery.

Yesterday's downbeat surveys of Europe's manufacturing and services sectors by the financial information company Markit showed that France was sucked back into a slump this month as manufacturing output fell and the services sector trod water. Germany meanwhile is suffering its weakest private sector growth in four months amid a worrying slide in export orders and the first fall in manufacturing jobs for two years.

Gloomy news from China also dampened the mood as its manufacturing sector shrank in March, fuelling fears of a hard landing for the world's second biggest economy.

The FTSE 100 shed almost 1 per cent as investors pulled money out of shares and into safe-haven gilts.

Markit warned that the eurozone's peripheral strugglers such as Spain, Italy, Greece and Portugal were faring even worse than its bigger players, putting the 17-member single currency bloc on course for a 0.2 per cent contraction in the first quarter on top of a 0.3 per cent slide in the final three months of 2011. The worsening economic news comes despite the European Central Bank pumping in more than €1 trillion (£835m) to prop up the financial system.

Markit's chief economist, Chris Williamson, said: "The eurozone is heading into a double-dip recession, China's manufacturers have had their worst quarter for three years and the Chancellor is talking about boosting exports. Where to?

"The risk is now geared towards a steeper downturn than any sort of recovery. The German and French numbers came in below even the lowest expectations."

Manuel Maleki, an analyst at ING, warned that France's economy would remain in the doldrums as tax rises kicked in and Nicolas Sarkozy fought against rival Francois Hollande for the French presidency. "This is likely to push firms and households to be cautious as long as there is no strong view on the result," he said.

The OBR reckons the UK will avoid a double-dip recession, but its fortunes are closely tied to the fate of the eurozone. The watchdog's detailed Budget analysis said a chaotic default by a European struggler would tip the economy back into a renewed slump, with the UK potentially shrinking 1.9 per cent under its downside scenario.

A drop in high street spending has dampened hopes of a new year bounceback for the struggling UK economy and underscored the pressures on households a day after George Osborne vowed to push on with Britain's austerity drive.

Retail sales volumes fell twice as fast as expected last month while January's rise was revised sharply lower, according to official statistics. The news is a blow to the chancellor as he pins his hopes on a recovery this year to avoid recession and soften the impact of the coalition's cuts. His budget on Wednesday quickly came under fire for ushering in a tax cut for the super rich while taking money away from pensioners and some working families.

Households have struggled with rising unemployment and with falling real incomes as their wages have failed to keep pace with inflation during Britain's lacklustre recovery.

Underlining those pressures, the Office for National Statistics reported that retail sales volumes fell 0.8% on the month in February, the sharpest drop in nine months. They were a mere 1% higher than a year earlier, less than half the 2.5% growth forecast by economists in a Reuters poll.

Analysts said the fall and downward revisions to sales growth in December and January cast doubt over the recovery that had been suggested by company results and business surveys.

"February's UK retail sales figures leave the recovery on the high street looking a bit more fragile than it previously seemed," said Samuel Tombs at Capital Economics.

"With the budget doing little to ease the burden of the next round of austerity measures due to hit households in April, the high street recovery looks set to be short-lived again."

The ONS said the February drop was driven by the sharpest fall for two years at "other stores", a category that includes jewellers, carpet stores, haberdashers and computer shops. Within in that the biggest drop was in sales of fine art and antiques.

In value terms, sales fell 0.4% in February, again the weakest performance since last May.

The data echo a cautious outlook from retailers, although there have been reports of high street profits recovering in recent weeks.

The head of Next, Britain's second largest clothing retailer, said earlier on Thursday that he expected the UK consumer mood to remain subdued in 2012.

"I don't think things are going to get any worse than last year, they may get slightly better, but I don't think they're going to get a lot better," chief executive Simon Wolfson said after reporting a 5% rise in profits last year.

He said the benefit to the British consumer of falling inflation was being offset by unemployment and tight credit availability.

He is also worried that a worsening of the eurozone debt crisis will hit UK consumer sentiment.

Kingfisher, Europe's biggest home improvements retailer, was also wary about the short-term economic outlook, but was confident of coping, thanks in part to improved margins on cheaper goods from China.

Meanwhile the longer term outlook for Britain's high streets remains uncertain, with a warning this week that four out of 10 shops will have to shut in the next five years as consumers turn their backs on traditional stores in favour of online shopping. A report from Deloitte highlighted how the boundaries between physical and virtual space were becoming blurred with thousands of shops likely to face closure.

Oil prices closed at $123 a barrel on Friday, and the cost of petrol on Britain's forecourts jumped to a record high. It was hardly the backdrop Europe's politicians had hoped for as they gathered in Brussels to rubber-stamp their new tax and spending rules (while stressing that growth, not austerity, is their priority).

Just when policymakers and businesses were daring to believe that growth was returning, after the eurozone crisis hammered confidence at the end of 2011, they've got a different and more viscous enemy to worry about. As Stephen King, chief economist at HSBC put it, "oil is the new Greece".

Even the most pessimistic commentators think the combination of the European Central Bank's long-term repo operation, and the €130bn bailout for Athens – albeit with half the money held back for the moment – has bought the eurozone some valuable time.

The extra €1 trillion of three-year loans sloshing around from the ECB's two interventions, in December and last week, has helped to avert the possibility of a full-blown credit crunch or a domino run of bank collapses for the time being. And the new loan to Athens will enable it to pay its bills for a while – though few believe that Greeks will ultimately put up with the penury to which they are being subjected.

But even as the flood of bad news from the eurozone abates for the time being, the crippling cost of commodities could choke off the recovery in Europe before it begins.

HSBC's King points out that early in 2011, there was an optimistic mood abroad and forecasters were pencilling in a healthy year's growth. Yet this renewed confidence, plus the cheap money that was the legacy of quantitative easing (QE) on both sides of the Atlantic, helped push up the cost of commodities such as oil and metals.

Even before the euro crisis reached its most dangerous phase last summer, these high commodity prices were depressing demand in the developed world – including from cash-strapped British families – and prompting the authorities in China, India and other emerging economies to tighten monetary policy to control inflation.

There are reasons to fear that oil prices could continue to rise this year, too: political tension in the Middle East over Iran's purported nuclear ambitions has already led to increasingly tight sanctions on a key exporter of crude. Iran, for its part, has threatened to retaliate by shutting off the crucial supply route of the Strait of Hormuz.

At the same time, some of the new wave of cheap money from the latest round of QE by the Bank, plus the ECB's repo operation, is likely to flow into commodities – after all, part of the way QE is meant to work is by pushing up the price of "other assets". And thirdly, as King points out, there is a longer-term trend towards higher prices, as the balance of global growth shifts over time towards more energy-hungry emerging markets.

And high oil prices are exactly what the fragile economic recovery doesn't need. In the short term, they feed straight through to high inflation, giving central banks a headache; but the west's debt-burdened consumers are unlikely to be able to stomach those prices for long. So in the longer term, costlier energy will bear down on demand, knock confidence and hammer growth.

Germany led the eurozone into a downturn in the final quarter of 2011, and GDP contracted in the UK too, but there had been hopes more recently that the worst was over.

But if the upward pressures on the oil price continues, Europe's strategy for economic recovery, such as it is, and George Osborne's hopes that the UK will scrape clear of a double-dip, may soon be consumed by an oil slick.

A record £400m was repaid from personal borrowings in December as consumers cut their debts, the Bank of England said on Tuesday.

The net repayment of unsecured loans was the largest since records began in 1993 as heightened concerns about the wider economy and jobs made consumers lose their appetite for borrowing.

Credit card borrowing was also flat for the third consecutive month, according to the latest Bank of England figures.

Mortgage approvals rose to a two-year high in December, but analysts said the housing market remains weak compared with long-term norms.

An extra 750,000 people will join the ranks of the long-term unemployed over the next four years due to deteriorating economic circumstances, according to new government forecasts.

The figures, lodged in the House of Commons library last week by the Department for Work and Pensions (DWP), show an increase of 32% from 2.4 million to 3.3 million in the number of people expected to be entered into the Work Programme – the government's flagship project for finding work for those who are typically out of work for longer than 9-12 months.

More than 100,000 prison leavers will now also be entered into the Work Programme for the first time but when this group excluded from the new total, the upward revision compared with 2010 DWP figures is 743,000.

The DWP has admitted that its revised figures are a response to the decline in the UK's economic fortunes reflected in the Office for Budget Responsibility forecasts in November when they dramatically slashed growth predictions for 2012 from 2.5% to just 0.7%.

The UK slipped into negative growth during the last quarter by 0.2% leading to fears of a double-dip recession and further hikes in unemployment.

A DWP spokesperson said the figures were also released in order to give fair warning to the charities and companies that administer the Work Programme, such as Ingeus-Deloitte, the security company G4S, and Action for Employment or A4e, as they struggle to fulfil the terms of current contracts and get people into jobs.

The main rise in entry to the Work Programme comes for those aged 18-24. The DWP now expects an 83% leap on last year's numbers and a further 71% rise for 2013/14.

The biggest increase in overall numbers is expected to come in 2013/14, when just over a three-quarters of a million extra people are expected to be looking for work under the Work Programme, 362,000 more than previously predicted.

In a statement, the DWP said: "The country faces a changing economic picture as shown by the latest economic and fiscal outlook from the Office for Budget Responsibility. It is only right that we revise our projections for people entering the Work Programme to reflect this."

The new figures also increase worries about the scarring effect that long term unemployment will have on the British labour market and, what politicians have termed, the "lost generation".

Chris Goulden, the head of research and policy at the Joseph Rowntree Foundation, said the figures were worrying, adding: "There's definitely a scarring effect, even for short periods of unemployment and the evidence is worse when you're younger. And protracted periods can start to affect your career later in life."

Paul Gregg, professor of economic and social policy at the University of Bath, who helped coin the phrase "unemployment scarring", was also concerned by the latest figures.

"We know that exposure to significant periods without work leads to long-term damage. We know that the costs of that to the individuals in higher future unemployment, lower wages, health-related problems is very large."

"This recession has been particularly focused on young people, and what is depressing at the moment is that we seem to be entering a second phase of the recession and it is still very much the case that all the pain is being borne by the young."

The revised estimates come as a National Audit report criticised the programme for being "over-optimistic" and said that the programme was only likely to help 25% of those out of work opposed to a government estimate of 40%.

The 32% increase in jobless people entering the Work Programme is likely to put further longer-term strain on the private companies and charity subcontractors that provide the back-to-work schemes, triggering fears that a number could go bust, and potentially putting the entire £5bn programme at risk.

The 18 major contractors face demanding targets – getting more than a third of the programme's projected 3.3 million clients into sustainable work by 2015-16 - in order to activate fees paid to them under the government's payment-by-results model.

Although contractors would receive increased upfront attachment fees of nearly £100m as a result of the higher volumes of work programme clients, the rising influx of new clients, coupled with the deteriorating job market, could force on them massive extra costs that could threaten their financial viability in the medium term.

Work Programme industry experts the Centre for Economic and Social Inclusion said: "The weaker labour market outlook means higher than anticipated Work Programme referrals and a much bigger challenge for Work Programme providers.

"In the short term, income from attachment fees will increase. But in the longer term job outcomes and sustainment payments are likely to be harder to gain than DWP would have expected a year ago." 

The figures also show a projected decrease in the numbers of long-term sick and disabled people entering the work programme.

This is believed to reflect the increasing numbers of incapacity benefit claimants who are found to be unable to work as a result of work capability assessments, as well as an explosion in those who are appealing against what they believe to be unfair decisions that they are fit for work.

The coalition needs to stop the gimmicks and the phoney war over bankers' bonuses and create a viable economic strategy

Here are some facts.

The UK's economy is stagnating and we could be heading for the first double-dip recession since 1975. In the last quarter the economy shrunk by 0.2 per cent, putting annual growth at 0.9 per cent. And although the official numbers are nearly always wrong and may well be revised, the auguries are not good.

Unemployment is at a 17-year high; one million youngsters are out of work, and the Bank of England predicts that the private sector is contemplating more job cuts across just about every industry from banking to haulage.

Still more worrying is the sharp collapse in manufacturing output – down 0.9 per cent, the steepest fall since the start of the recession in 2008. This is the most disappointing news of all as the hope had always been that private companies – and the revival of manufacturing and exports in particular – would pick up the slack from those jobs being lost in the public sector.

So what are the politicians doing? Out to lunch as far as one can tell. Nick Clegg seemed to be the only one with a spine last week, calling for an immediate increase in the tax threshold to £10,000 to reduce the burden for low to middle income Britain. Otherwise our political masters have been either wasting time prattling about Sir Fred Goodwin's gong, or gallivanting around Europe annoying our neighbours. Labour's front bench was equally spineless, spouting off the predictable blame-game stuff while David Cameron made a bad error in showing off his Euro-bashing credentials again.

Why Cameron chose Davos to tick off his fellow European heads of state about the perilous state of their countries is beyond me; it's neither friendly nor helpful at such a fragile time. That he may be right is beside the point, and, if he's not careful, they'll bring back passport control. Instead, the Prime Minister might have been better served had he suggested how the Continent might work together to improve growth and productivity, for that's the only way out of this crisis.

It was this time last year that the Chancellor, George Osborne, also speaking at Davos, urged the UK's captains of industry to start spending the £65bn or so they have squirrelled away for a rainy day. But the UK's industrialists haven't listened to him, and there is more, not less, cash on deposit. New investment in capital and plant is at rock bottom while a lot of British money is flooding overseas, mainly to tax havens if the chaps I've been talking to in Jersey are right.

Why aren't they investing? That's what Cameron and Osborne should be asking. It's too easy to criticise the EU for its punitive workplace regulations when ministers are doing absolutely nothing about reforming our own labour rules. A question of do what I say not what I do, perhaps?

All the industrialists I speak to say they are being clobbered by soaring energy costs and stifling regulations, whether it be new green taxes or tax on R&D investment. More pertinent is the cost of employment for small businesses. There's been nothing to encourage the UK's 4.6 million SMEs to employ more: if each one took on one extra worker, unemployment could be slashed.

We're still in a deleveraging recession, not a destocking one as in previous recessions, so different tactics are needed. Tim Morgan of Tullett Prebon made a good point when he said last week that neither the Government nor Opposition has come clean with the public on one key point – that "every traditional economic policy lever has been tried, and has failed".

We've had low interest rates, devaluation, stimulus and quantitative easing in spades. He's also right to say that relaxing the deficit-reduction plan to spend more will upset the markets, but doing so to cut taxes and boost growth might work. And tax cuts, particularly for low- to middle-income earners, would boost growth and pay for itself.

That's why we need a plan for growth, one which doesn't mean abandoning the deficit-reduction strategy. But if the country does go into a double dip, then spending and welfare payments will go up again and tax revenues will go down. Then it won't be long before the UK's triple-A rating goes down with it.

Part of the problem is that the coalition appears to believe that it has a genuine growth policy. It doesn't. We have a parody of a policy that has been masquerading as one, along with gimmicks like the Mary Portas review to save the high street.

Now is the time for big ideas. The Government should stop the phoney war with the banks over bonuses: if it doesn't approve of Stephen Hester's pay package at Royal Bank of Scotland then it should be renegotiated, not debated through the newspapers. A contract is a contract and should be respected – or changed.

Instead, Cameron and Osborne should get their gloves off over the real issue : lending to SMEs. Then we need bold tax incentives for companies to take on the young via more apprenticeships, tax breaks for R&D, tax cuts for the squeezed middle and serious resources – time as well as money – should be invested in education to ensure we have the best and the brightest.

Osborne has worn his hairshirt well; now it's time to see the true colours underneath. A Plan G would be start.