George Osborne and Danny Alexander made an odd couple last week, wearing their matching Bob the Builder-style hard hats on a factory visit.

They could have done with them yesterday when the UK "growth" figures were released. The customary Cassandras were predicting a contraction of 0.4% at worst between April and June. Instead the second quarter came in at minus 0.7%. "Disappointing" chorused the Chancellor and Chief Secretary to the Treasury, trumpeting recent announcements on lending and infrastructure investment and intoning the usual mantra about "dealing with our debts at home and the debt crisis abroad". But the verdicts on the figures were emphatic: "Calamitous, catastrophic, shocking, an economy in tatters".

It's hard to disagree. The now notorious Plan A relied on annual growth of between 2% and 3%, the level necessary to persuade businesses to invest and take on staff. Instead the UK economy has contracted for three consecutive quarters and is now smaller than when the Coalition came to power in 2010. In fact, output is still 4.5% less than in spring 2008 and the deficit is growing again. After 15 months of contraction in 2008 to 2009, here is a second recession and it's getting deeper. Not so much double dip as double deep trough. In fact, it's the worst combination of recession and weak recovery for 100 years.

Yes, this is preliminary data and figures for June are largely guesstimates but revisions are as likely to be down as up. As Mr Osborne conceded yesterday, the extra Jubilee holiday and poor weather aren't excuses, especially for the dreadful construction sector figures, down 5.2% on the first quarter. No surprises here. It's those deep cuts in Government infrastructure spending starting to bite. The Scottish figures are likely to be even worse as the Scottish Government took an even heftier axe to its capital budget. Trying to accelerate public sector building now won't yield measurable results for months.

Then there's manufacturing, down 1.3%. So much for that "export-led recovery" we were promised. This week Britain was judged most at risk from the worsening eurozone crisis by risk analysts Maplecroft.

By comparison, the 0.1% drop in services looks respectable but as the sector accounts for 75% of the economy, the effect of even a modest fall is magnified. No surprise here either. When a government sucks £3 billion of tax credits out of the pockets of the poorest working families – the people most likely to spend every penny they have – what do they expect? The figures have prompted a call from the Child Poverty Action Group for the Coalition to rethink its welfare policy. Good luck with that one.

What's especially worrying, as Lord Oakeshott observed, is that these figures reflect an economy in which Olympics-fuelled London is overheating while the rest of the UK shivers in cold storage. (Within Scotland, a still buoyant Aberdeen disguises a deeper recession elsewhere.)

The best-case scenario is that we will get what economists fondly refer to as "a dead cat bounce" in the third quarter. So if the next set of growth figures are marginally less disastrous, this will be misinterpreted as a sign of life. Even that seems dangerously optimistic. Currently our two most hopeful indicators are inflation (coming down) and employment (edging up). But they both come with health warnings.

Inflation is falling fast, partly because shops are slashing prices in their desperation to make us buy, hardly a sign of recovery. Besides, with wages still static or falling, even 2% inflation merely means that we are getting poorer more slowly than before. And with average personal debt of £5000 per person and record numbers of Scottish company liquidations and personal insolvencies, don't hold your breath for a stampede back to the shops.

As for employment, how many of those 800,000 private sector jobs Mr Osborne claims have been created on his watch are minimum wage, part-time and insecure? Even perennial optimists predict that unemployment will rise once all those Olympics jobs come to an end and public sector cuts bite harder.

And if these figures look bad to us, just wait until the credit rating agencies, by which the Chancellor sets such store, have a chance to digest them. No wonder Labour's Ed Balls sounded a bit smug yesterday. The idea that the speed of deficit reduction ("not cutting too far too fast") is crucial to keeping the economy moving forward may have been a hard idea to sell to a hostile public but it turned out to be bang on the money.

Where to go from here? If the Government's latest attempt to force the banks to lend fails as miserably as its predecessors, then it is time for a national investment bank lending directly to business. Let's hear no more about quantitative easing. Printing electronic money and stuffing it down the throats of banks has merely resulted in historically low bond yields and the lowest annuity rates in living memory, which is a nightmare for those on the point of retiring.

As far as fiscal policy is concerned, cuts in corporation tax are getting us nowhere. In fact, British companies are now sitting on an estimated cash mountain of £750bn. That's a measure of how effectively Osborne & Co sucked confidence out of the British economy with scare stories about a Greek-style sovereign debt crisis. Few expect cutting the top rate of income tax to do much for the economy either. The rich are more likely to spend on imported luxuries.

The best and quickest way of stimulating growth would be a VAT cut, though the Coalition appears to have set its face against it, precisely because Mr Balls so strongly favours it. I would go further and reverse the cuts in tax credits and help poor working families, the group shouldering the biggest burden. Next, the Government should call a halt to the so-called "reform" of housing benefit, another costly fiasco that will further impoverish the poorest, disincentivise work and threaten economic recovery. Finally, replace Mr Osborne. Can he mend the UK economy? No, he can't.

l Iain Macwhirter is away.