UK expected to be declared out of recession tomorrow

Chancellor's prediction will be proven correct, but spending cuts still loom

The worst recession since the 1930s should be officially declared over tomorrow. Economists are almost certain that the Office for National Statistics will reveal that the UK's economy grew by about 0.3 per cent in the last three months of last year, leaving Britain the final major economy to have emerged from recession. Gross domestic product (GDP) is 6 per cent below its 2008 peaks.

An apparent rush to the shops to beat the increase in VAT on 1 January, the Government's vehicle-scrappage scheme, and a revival of exports are thought to be boosting output. The widely anticipated announcement will mark the end of 18 months of continuous economic decline that has cost the economy £100bn in lost output, and has seen 1.3 million workers made redundant and 50,000 families lose their homes through repossession. Last year was the worst year for the British economy since 1921.

However, economists are warning that a "two-speed" recovery may sharpen the North-South divide, as cuts in public spending hit the north of the country harder than the south. Across the nation, too, output is unlikely to return to pre-credit-crunch levels of output for many years, as the economy labours under the burden of public and private debt, and faces the reversal of the unprecedented monetary and fiscal boosts administered over the past year or so.

In an interview yesterday, the Chancellor, Alistair Darling, was restrained about the nation's prospects, saying: "I don't know what the figures are because I don't get them until Monday, but I remain cautious. There is still a lot of uncertainty around." Nonetheless, ministers are likely to be relieved that the Chancellor's Budget prediction – repeated many times since April – that growth would return "around the return of the year" has been proven correct.

Official caution about the strength of recovery reflects the depth of the recession and its special nature. Unlike most previous economic downturns, usually provoked deliberately by governments attempting to restrain inflation, this is the first since the 1930s where shortage of private sector credit – and indeed the near-collapse of the entire financial system – was responsible for a slowdown, with deflation, the biggest fear during the earlier parts of the crisis.

The Bank of England Governor, Mervyn King, cautioned some weeks ago that the end of recession would not be a moment to "get the bunting out", warning that the economy faced a long, hard slog to rebalance itself and find new engines of growth. The Bank's latest forecast is that output will not return to 2008 levels before 2011.

Mr Darling reiterated his tough stance on public spending and, in particular, on the pay of highly rewarded workers in the state sector. He said: "In some quangos, local authorities and other organisations, the level of pay, especially at the top end, and bonuses have reached the stage where they don't pass what I call the next-door neighbour test. If you cannot justify them to your neighbour, you've probably got it wrong."

Douglas McWilliams, the chief executive of the Centre for Economics and Business Research, gave warning that recoveries in regional economies such as those in Wales, Scotland, Northern Ireland and the North-East of England would be slowed down by the expected fiscal retrenchment.

"The model of financing public-sector jobs in the North from taxes in the South has irrevocably broken down," he said. "That means many regions face a painful adjustment while the private sector in these regions re-establishes itself."