UK recession deepens

A row over George Osborne's future as Chancellor erupted today as new GDP figures showed the recession had deepened.

As the ONS reported the economy had contracted by 0.7%, Lib Dem peer Lord Oakeshott called for Mr Osborne to be replaced by Vince Cable in a reshuffle.

Dr Cable himself played down any possibility of him replacing Mr Osborne. However in an interview with BBC’s Newsnight he said he thought he would make a good Chancellor.

“I probably would but George Osborne’s doing the job, we’re doing it together, well, as part of a team, and nobody’s suggesting that we change the arrangements.”

Earlier Treasury Chief Secretary Danny Alexander appeared reluctant to directly answer questions about Mr Osborne being moved, saying only that "we have a very strong team in the Treasury". However in an afternoon interview on BBC News he was clear that Lord Oakeshott was "completely wrong" to call for Mr Osborne to quit.

Lord Oakeshott said the GDP figures were "dismal", and argued that "any business failing in its key objective like this would change strategy or management or probably both". He urged the appointment of Vince Cable as Chancellor during the next re-shuffle, along with the reappointment of David Laws.

Shadow Chancellor Ed Balls said it was "no wonder" he had made the suggestion, given the "shocking" figures.

Mr Balls later indicated he would be prepared to join a 'grand coalition' of all parties to try to solve the economic crisis. He told Channel 4 News:

"That would be exactly the right thing to do – it would be putting the economy and our long term interests first."

Both the Chancellor and David Cameron acknowledged the GDP figures were "disappointing", but Mr Osborne claimed they were a sign of "deep-rooted" problems in the British economy. The Prime Minister said the Government was "doing everything we can to get out of this situation".

Ed Miliband argued the figures showed the need for a 'Plan B', telling reporters: "I have to say, how much worse do things have to get before this government changes course?"

Earlier Mr Osborne said: "We all know the country has deep-rooted economic problems – these disappointing figures confirm that we’re dealing with our debts at home and a debt crisis abroad.

"We have cut the deficit by 25% and businesses have created 800,000 new jobs. We need a relentless focus on the economy, and recent announcements on infrastructure and lending show that’s exactly what we are doing."

The figures also showed a dramatic drop in construction output, with a 21.3% reduction in infrastructure building and 22.9% decrease in public housing work.

The ONS said that despite the unexpectedly poor baseline figure, there were positive signs in the underlying economy. The Jubilee bank holidays, the ongoing eurozone crisis and the bad summer weather were all cited as possible factors in the contraction.

But Mr Osborne stressed that one-off factors were "not an excuse" for the poor performance of the economy.