Telegraph:

OECD figures suggest Britain's economy will slip back into recession at the start of next year
Britain will slip back into recession at the start of next year, ministers have been told.
By Robert Winnett, Political Editor
10:00PM GMT 25 Nov 2011

The Organisation for Economic Development and Cooperation (OECD) is predicting that the economy will shrink, the Government was warned on Thursday.

Whitehall sources said the forecasts suggest that growth would be negative during the first six months of next year due to the euro crisis.

The prediction, to be published on Monday, is the first from a respected forecaster to indicate that Britain faces a double-dip recession.

The preliminary findings of the OECD, to be released on the eve of George Osborne’s Autumn Statement, are said to have “sent a lightning bolt” through the Treasury and Downing Street. On Tuesday, the Chancellor will announce his growth strategy, which will lead to billions of pounds in infrastructure spending and a scheme to increase loans to small and medium-sized businesses.

However, officials at the OECD, which is backing the Coalition’s austerity drive, are believed to have advised the Treasury that it may have to draw up a so-called “Plan B” to slow public spending cuts if the single currency crisis is not resolved imminently.

The OECD forecast is understood to predict that the second recession will be very mild, before the economy begins to recover again in the summer.

It is also expected to predict a damaging recession on the Continent as European leaders fail to address the eurozone crisis. The price of Italian bonds hit a record on Friday of almost eight per cent and the country may soon need an international bail out.

David Cameron and Mr Osborne are growing increasingly exasperated at the failure of European leaders to tackle the single currency crisis. Mr Cameron has already warned of the “chilling impact” the turmoil is having “every day” on the economy.

Next week, the Government’s Office of Budget Responsibility (OBR) will publish its forecasts for the economy and public finances.

The OBR is expected to downgrade its forecast for economic growth, but it is not known if a second recession will be predicted.

However, the OBR will warn the Government that the plan to tackle the national debt may take longer than first expected. As part of the Chancellor’s growth strategy, high street banks may be provided with Government money to offer low-cost loans to companies.

The Chancellor is working on a multi-billion-pound “credit easing” scheme to make it easier for firms to borrow money, as the centrepiece of his attempts to boost the economy.

It is understood the Treasury is considering borrowing money on the international financial markets and then loaning it directly to small and medium-sized companies through the banks. The scheme would allow firms to borrow money at below-market rates and would help stop the current problem of banks refusing to offer enough credit. Over the past few years, ministers have repeatedly tried to force banks to offer more loans, particularly to small and medium-sized businesses, with mixed results.

Another key part of the growth strategy involves plans for infrastructure projects worth a total of up to £50 billion. Pension funds will be encouraged to invest in the Government-funded schemes, such as toll lanes and power plants.

The growth strategy will also set out longer-term plans to “rebalance” the economy away from the City and financial services.

The Chancellor will announce an extra £600 million investment over the next three years to provide 100 free schools for children in England.

These will include a series of specialist maths schools for teenagers aged 16 to 18, which ministers believe will produce a generation of scientists and engineers.

The schools will be connected to “strong” university maths departments, which will be allowed to select the most able children on the basis of their mathematic and scientific ability.

A Whitehall source said: “This is a very exciting programme. We want to get the top notch academics together with top notch children to develop the best maths education in the world. Initially these new maths schools will probably be in university towns, they may even offer boarding facilities to attract the strongest pupils from across the country. It is high risk, but potentially high reward.”

On Friday, ministers announced a £1 billion scheme to pay companies to take on unemployed youngsters.

However, more experienced ministers warn that there are limits to what the Government can do amid the global economic “tsunami”.

In an interview with The Daily Telegraph on Saturday, Francis Maude, the Cabinet Office minister, said the Chancellor’s package would not be “dramatic”. He said ministers “cannot change the weather” on the economy.

“Supply-side reforms are not an overnight shot in the arm,” said Mr Maude, a minister under John Major in the 1990s.

“They are about improving the medium and long term competitiveness of the economy. They tend to be incremental.”

The deteriorating economic situation is also expected to spur the Bank of England into taking further action. The Bank’s quantitative easing scheme, effectively printing money, is expected to be expanded again next year.