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Latest GDP Drop Puts Pressure On Osborne

(c) Sky News 2013

A lot of people suspected the news would not be good. It turns out it was even worse than expected.

Britain's economy is shrinking once again - and far deeper into negative territory than was anticipated.

That 0.3% decline in the fourth quarter of 2012 leaves Britain's gross domestic product 3.3% shy of its 2008 peak.

It's deeply embarrassing for the Chancellor, who told Sky News earlier today that despite this setback it was "a reminder that Britain faces a very difficult situation.

"We have problems at home but there are also problems abroad. You can either run away from them - and the British public understand there is no overnight solution and we are heading in the right direction."

But according to the Shadow Chancellor, Ed Balls, the figures are the "moment when David Cameron and George Osborne’s complacency is completely exposed".

And it leaves the UK even further shy of its international counterparts. In Canada, the US, Germany, China and plenty of other major countries, GDP has already rebounded to the level it was before the crisis.

Britain, on the other hand, remains below that peak - even five years after the crisis started.

The National Institute for Economic and Social Research defines a depression as a "period when output is depressed below its previous peak."

By that definition, Britain is still stuck in a depression - and this depression is longer than any in recorded economic history: even the 1930s.

In the end, this is the challenge for George Osborne. Britain's total capacity to produce wealth - which is in essence what GDP measures - has diminished substantially during this crisis. That, when it comes down to it, is what lies behind the squeeze so many families are facing on their incomes.

And the economy's inability to regain meaningful growth is something that should concern the Chancellor. There is now growing pressure (even more than the significant amount there was before) for him to reconsider his fiscal plans.

It isn't merely Nick Clegg: the International Monetary Fund's chief economist, Olivier Blanchard, believes that having warned Mr Osborne multiple times that he needs to be ready to change course if the UK economy disappoints, that moment has now come.

Whether this pressure will be enough to force Mr Osborne to change course is another question. He has been so forthright about the need for austerity all the way through the crisis that it would surely be politically humiliating to do an about-turn now.

And indeed, the evidence is that the austerity practiced in the UK hasn't actually been as aggressive as the Chancellor has made it sound.

However, the Chancellor refused to answer whether he agreed or disagreed with Mr Blanchard's advice.

Pointing to alternative support from the former IMF chief economist he said: "You're going to get economists disagreeing. I'm absolutely clear: we have the right plan. It was not a plan that was going to deliver results overnight."