LONDON Britain's economic recovery remains precarious, data on Tuesday showed, with construction activity falling and retail sales weaker than expected - a blow to the government the day before a budget statement.
The weak data was accompanied by a report from the British Chambers of Commerce that said economic growth in the next two years will be slower than previously thought.
"The data support the evidence we've had that the fourth quarter is shaping up to be pretty weak, supporting the idea the Q3 rebound was entirely due to temporary factors," said Vicky Redwood at Capital Economics.
"It's not a particularly good backdrop for Osborne to be presenting against. He remains hemmed in."
Finance minister George Osborne is due to deliver a half-yearly budget statement to parliament on Wednesday.
He said on Sunday that closing the budget gap was taking longer than forecast, while weak growth means public borrowing is not falling as planned, endangering Britain's triple-A credit rating, which Osborne has pledged to defend.
The Conservative-led coalition government's failure to deliver a strong recovery is its biggest political problem and polls show the opposition Labour party would regain power if an election were held now.
The Bank of England launched a flagship scheme to boost lending in August, adding more stimulus on top of its 375 billion pounds of quantitative easing, but initial figures on Monday suggested any benefit to growth is several months away.
In its report, the BCC said the government needed to do more to support growth, job creation, exports and investment. But Osborne has insisted he will stick with the thrust of his deficit-reduction program.
After suffering two recessions in four years, Britain bounced back to growth last quarter after receiving a huge boost from extra working days and London's hosting of the Olympic Games. But the economy is forecast to expand at a tepid 0.1 percent in the last three months of 2012, with little pick-up seen in the year ahead.
The BCC revised down its growth forecasts for 2013 and 2014 to 1.0 and 1.8 percent respectively from 1.2 and 2.2 percent, citing the global slowdown, domestic austerity measures and weak household consumption.
The downbeat view was supported by the Markit/CIPS Construction Purchasing Managers' Index (PMI), which fell to 49.3 last month from 50.9 in October, showing construction activity shrank last month. Confidence about the next 12 months fell to its lowest in almost four years, the survey showed. The headline figure was the lowest since August and below the 50 mark that separates growth from contraction for the third time in four months. It was also below even the weakest forecast in a Reuters poll and well short of the median 50.5 prediction.
"This latest data ... set the scene for continued difficult trading during 2013," said Simon Rawlinson, head of strategic research at consultancy firm EC Harris.
New orders saw their steepest decline in just over 3-1/2 years last month, the survey found, pushing firms to shed jobs at the fastest pace since December 2010 in anticipation of a prolonged period of depressed demand.
Official data suggests construction output is more than 10 percent lower than a year ago.
British retail sales edged up in November, though by less than analysts were expecting, as shoppers hunted for cheap Christmas gifts, the BRC said.
The improvement follows a solid reading from Confederation of British Industry's November retail sales index and a rise in consumer confidence on the GfK measure to its highest in 18 months after weak official data in October.
Like-for-like retail sales - a measure that strips out changes in floorspace and is favored by equity analysts - rose by 0.4 percent in value on the year, after falling 0.1 percent in October, the BRC said. Economists polled by Reuters had expected a 0.9 percent rise.
"Today's report shows that retail sales failed to progress as the economic outlook is rather uncertain and labour market conditions are set to deteriorate in the coming months," said Annalisa Piazza at Newedge Strategy.
Trade group BCC, representing firms employing more than one in five private-sector workers in Britain, said unemployment was likely to peak at around 8.1 percent in the final months of next year partly due to job losses in the public sector.
Data released on Monday showed manufacturing activity shrank less than expected in November, though the sector remained fragile, while figures due on Wednesday are expected to show that growth in Britain's services sector picked up. <GB/PMIM>
(Additional reporting by David Milliken and Olesya Dmitracova; Editing by Catherine Evans)