It's bad news and raises the spectre of double dip recession further spooking consumers who are reluctant to spend having experienced the biggest drop in real incomes for decades, thereby denting the nascent revival of consumer and business confidence seen of late. Let's hope that doesn't happen. It also raises questions over the government's handling of the economy and whether it is cutting too far too fast - a key criticism from the Shadow Chancellor Ed Balls.

But business organisations and quite a few analysts are saying that the underlying strength of the economy is more robust than these growth figures suggest. They point to survey data such as that by the British Chambers of Commerce quarterly survey which suggested that the UK economy grew by 0.3% in the first quarter of 2012.

But you can only push that argument so far. It's true that forward looking surveys paint a more positive picture. And it's true that the GDP drop was driven in large part by a big fall in construction activity and as a relatively new series of data there are indeed questions over the accuracy of those figures. However, the fall in construction activity was in fact smaller than expected.

What's more, there are big cuts in government construction spending just beginning so expect no sudden improvement on this front. It should be noted that public sector net investment was cut by some 25% last year, with a big impact on construction activity. So with less public investment in roads, schools, houses and hospitals it's no wonder construction spending has fallen.

But even if you exclude construction figures the economy would have anyway flatlined - as indeed it has done since late 2010. The big surprise in the figures was in fact the very poor growth in services output of just 0.1% in the first quarter when some forecasters were suggesting it had grown by as much as 0.5%. Services didn't do anywhere near enough to offset weak industrial and construction figures, down 0.4% and 3% respectively, and this reflects the lack of consumer and business confidence at the start of this year.

Overall we shouldn't dismiss the GDP figures as something that will be revised upwards later, as some have argued. And even with a hoped-for pick-up later in the year, overall growth this year may be no more than an anemic 0.5%. That's nowhere near high enough either to get unemployment down or to deliver the tax revenues the government needs to bring the deficit down according to the already-revised plan.

Put this into context: the UK economy contracted by over 7% during the 2008-2009 recession, which lasted for five straight quarters. Since then the recovery has been the slowest in a hundred years and has been worse even than that after the 1930s Great Depression, with GDP falling in four out of six quarters. The UK is still some 4% below output in 2008, real incomes are falling, and the much heralded rebalancing and 'march of the makers' has gone into reverse - for now at least.

On big question is whether the Bank of England will respond by printing more money through its 'quantitative easing' (QE) programme. That was always the government's hope for enabling growth in the economy, with a super tight fiscal policy offset by low interest rates and more QE, thereby enabling both domestic business investment and exports via a competitive pound.

While higher than expected inflation has hamstrung more QE, these GDP figures suggest it may be back on the agenda at some point if the Bank of England prioritises growth and if inflation comes down further.

All of this puts the Chancellor George Osborne in a tricky place. To be fair, he inherited a deeply imbalanced and structurally weakened economy with the biggest budget deficit in the UK peacetime history. Deficit reduction and rebalancing was and is needed.

But since late 2010 the embryonic recovery has been effectively snuffed out by toxic cocktail of hyperbolic claims by the Chancellor of a Greek style crisis, a rush into austerity in the UK and Europe, a very tight squeeze on real incomes and a Eurozone crisis which has crippled several of our major export markets.

Some have blamed the latter for the UK's woes. That not right - in fact the net trade position has actually boosted growth, but not by as much as had been hoped. It's the domestic situation which has dragged the UK back into recession.

This double dipping increases the risk of one or more credit rating agencies removing Britain's AAA status. That's ironic given how much store Osborne has set in maintaining this rating almost at all costs. But even if it did happen, so what? The US saw its costs of borrowing fall when it lost its AAA status, as did France. As David Blanchflower has rightly noted, if the consequences of trying to keep AAA are rising unemployment, falling growth and declining living standards, then perhaps they are worse than the costs of losing it.

I'd previously described the UK economy as 'flatlining' in my blogs here at the Birmingham Post. At best I've been accurate and at worst I've been too generous in my assessments. Two years ago George Osborne rolled the dice rolled the economic dice by setting out to eliminate the structural deficit by the end of this parliament (subsequently extended into the next parliament). So far that gamble has failed to pay off.

The key message here is that austerity isn't working, and that's before the bulk of the spending cuts start to bite. The UK still needs a growth strategy, including a proper industrial policy if 'rebalancing' means more than a soundbite.

Professor David Bailey works at Coventry University Business School.