The Office for National Statistics has confirmed that the UK economy remained in recession during the second quarter of 2012 after output fell by a much bigger than expected 0.7 per cent. Real GDP has now fallen for three consecutive quarters and in five of the last seven quarters. Output is still 4.5 per cent lower than at its peak at the beginning of 2008.

There were some special factors in the second quarter that will have affected output: the extra Jubilee bank holiday and the atrocious weather. But it is unlikely that they fully explain the fall. The underlying economy is performing far worse than the coalition and most economic forecasters expected.

Meanwhile, the crisis in the eurozone worsens. Concerns are growing that Spain will have to ask for a full bail out after yields in the country rose to their highest level since the inception of the euro.

And Greece is edging nearer to the point where it might have to leave the eurozone, a move that could trigger a financial shock wave and potentially severe credit crunch across the region. In such circumstances, the UK might find itself stuck in recession during the second half of the year.

There have been some government initiatives in response to the worsening outlook. It has launched the ‘Funding for Lending’ scheme, under which the Bank of England makes cheap funds available to banks on the condition that they will be used to increase lending to businesses and individuals, and promised to guarantee up to £40 billion of infrastructure spending. But the chancellor refuses to budge on his deficit reduction strategy.

This is despite the IMF, in its latest report on the UK economy published just last week, saying that fiscal consolidation over the last two years has reduced GDP by 2.5 per cent and suggesting that: "The UK has the fiscal space" to increase borrowing in the short-term.

An increase in borrowing – to fund extra infrastructure spending, a job guarantee for the long-term unemployed and a two-year two pence cut in employees’ National Insurance contributions – is one of the measures to get the economy back on the road to growth set out in a recently-published IPPR paper. It argues that the chancellor should implement a combination of Keynesian and supply-side policies to get the economy growing again in the next few years and to ensure growth is sustained well into the medium-term.

Of course, it is very unlikely that the chancellor will countenance a change in his fiscal plans, but there is something else he could do that might lift economic growth. He should publish his contingency plans for a serious worsening of the euro zone crisis. In May, he was reported as saying the British government is doing "contingency planning for all possible outcomes" to the eurozone crisis. Now is the time to reveal the results of that planning.

It is evident from numerous consumer and business surveys that levels of confidence are low and this is holding back spending by households and investment and recruitment by firms. One of the biggest dampeners on confidence is uncertainty about the economic outlook and one of the biggest uncertainties is the risk that a renewed credit crunch in Europe could extend the UK recession into 2013.

If the government has contingency plans to deal with such a situation, there can be no possible benefit from keeping them under wraps. In fact, the opposite is true. Publishing the plans could help lift the economy.

By setting out its plans for dealing with a deepening crisis in the eurozone, the government – assuming those plans are credible - will alleviate some of the worries that are holding back spending now. In particular, if businesses, after seeing the government’s plans, are a little less concerned about the outlook for the economy, they will – at the margin – be more inclined to invest and take on additional workers. For the government, this is a cost free way of potentially boosting the economy, and one it should follow immediately.

Tony Dolphin is chief economist at IPPR

Tags: Bank of England, Eurozone, Funding for Lending, GDP, George Osborne, Greece, Ippr, Recession, Spain, Tony dolphin