* Business * Economic growth (GDP) Poor GDP figures add to pressure on Osborne

Construction industry income fell 3.4% during the first three months of 2011. Photograph: Roger Bamber/Alamy

The Office for National Statistics has maintained that a dramatic fall in construction activity restricted UK economic growth to 0.5% in the first quarter of the year.

Construction industry income fell 3.4% during the first three months, a slight upward revision on initial estimates, offsetting a 0.9% rise in services, the ONS said.

It confirms that the economy has remained flat for almost nine months after a drop in GDP of 0.5% in the final quarter of 2010 and zero growth in the last month of the third quarter.

The figures will come as a disappointment to the Treasury which is under pressure from backbench coalition MPs to show that cuts in public services and an emphasis on safeguarding the public finances have boosted confidence and injected some life into the economy.

George Osborne has been urged by Labour to prepare a "Plan B" of tax cuts and investment initiatives to kick start growth.

Rightwing pundits have urged the chancellor to embark on tax cuts mixed with steeper reductions in public spending to prevent the economy falling back into recession.

The OECD, the Paris-based thinktank, recently warned the UK government that if the economy continued to flatline it should consider tax cuts for the low paid to boost consumption.

The figures come amid mounting gloom in the UK retail sector, where more than 10,000 jobs are now at risk. Thorntons announced the closure of up to 180 stores on Tuesday, threatening around 1,000 jobs and Carpetright also added to the gloom, axing this year's dividend and warning that it sees "no respite" from the challenges that have forced several high street names into administration in recent weeks, including Liverpool-based TJ Hughes.

The ONS figures showed consumers had reduced their savings to accommodate a surge in inflation, which jumped to 4.5% last month.

The household saving ratio was 4.6% compared with 5.1% in the previous quarter. Real household disposable income also fell by 0.8% following a fall of 0.9% in the fourth quarter of 2010.

Many economists believed the three months up to the end of June will also show little or no growth, further adding to concern inside and outside the Treasury that the current policy needs to be revised.

Alan Clarke, chief UK economist at Scotia Capital, said he feared the UK would struggle to grow in the spring and summer months.

Howard Archer, chief UK economist at IHS Global Insight was marginally more upbeat about the immediate growth prospects, though he warned that the chancellor risked undershooting his fiscal targets.

He said: "We expect GDP growth to be limited to 0.3-0.4% quarter-on-quarter over the rest of 2011, thereby limiting growth to 1.3% in 2011. Growth is seen improving modestly to 2% in 2012.

"These GDP growth forecasts are significantly below the Office for Budget Responsibility's projections of 1.7% in 2011 and 2.5% in 2012, suggesting that the chancellor is highly likely to undershoot on his target of reducing the Public Sector Net Borrowing Requirement (excluding financial interventions) to £122bn in fiscal 2011/12 from an upwardly revised 2010/11 outturn of £143.2bn."

He added: "Given the softness of the economy, serious concerns over the consumer and the fact that the fiscal tightening is now increasingly kicking in, we expect the Bank of England to hold off from raising interest rates until the second quarter of 2012."