Surprise as UK economy remains in recession

THE UK economy shrank by 0.4 per cent in the third-quarter, indicating that the deepest recession in a generation is not yet over.

From a peak in the first quarter of 2008, the UK economy has now contracted by 5.9 per cent, the Office for National Statistics reported. The recession has now lasted for six quarters, the longest downturn since the second World War.

The figures are a big shock after economists had expected growth to return in the quarter, with the average forecast predicting a 0.2 per cent rise in output. The UK Treasury forecast at the time of the budget in April that growth would return in the fourth quarter, but the Bank of England had expected 0.1 per cent growth in the third quarter.

However, a sharp 0.7 per cent contraction in industrial production, combined with a further 0.2 per cent decline in services output, put paid to hopes that the recession might be over.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said the figures made “the recession look more like a depression”.

Alistair Darling, the British chancellor, said yesterday: “I’ve always been clear that growth will return at the turn of year, as my budget forecast confirmed. We’re facing the worst global financial crisis and recession in 60 years. We’ve always said that we remain cautious as a result of the high degree of economic uncertainty.”

In a remark aimed at the opposition Conservative party, which has argued for sharper action to reduce the budget deficit, Mr Darling said removing fiscal stimulus now would be ”madness”.

Sterling fell more than 1 per cent after the data were released and gilt yields dropped as expectations grew the Bank of England would be forced to increase the quantitative easing programme of buying government bonds.

The UK GDP numbers were in contrast to fresh figures from the euro zone that showed private sector economic activity grew at its fastest pace for almost two years this month.

The UK economic figures will raise fears that the UK may be facing a deeper and more prolonged downturn. – (Copyright The Financial Times Limited 2009)