Dal Financial Times
UK economy shrinks in third quarter
By Daniel Pimlott, Economics Reporter
Published: October 23 2009

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 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 and on a par with that of 1979-81.
The data 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 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, chancellor, said on Friday: “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 pointed remark aimed at the opposition Conservative party, which has argued for sharper action to reduce the budget deficit, Mr Darling said that removing fiscal stimulus now would be
”madness”.
George Osborne, the shadow chancellor, said the data showed that the UK needed a change of economic direction to get the country working again.
“There are many millions of people who will be deeply concerned to see that Britain is still in recession six months after France and Germany came out of recession. It destroys the myth that Britain was better prepared,” he told Sky News.
Sterling fell more than 1 per cent after the data were released and gilt yields dropped as expectations grew that the Bank of England would be forced to increase the quantitative easing
programme of buying government bonds. The FTSE 100 rose nearly 1.5 per cent.
The UK GDP numbers were in sharp contrast to fresh figures from the eurozone that showed private sector economic activity grew at its fastest pace for almost two years this month.
The fresh turn in the economy will raise fears that the UK may be facing a deeper and more prolonged downturn. The economies of France, Germany and Japan started growing again in the second quarter and the US looks likely to have started growing again in the third quarter.
The figures will also put pressure on the Bank of England to increase its £175bn QE programme, and on the government to offer fresh measures to boost the economy in its pre-Budget report, due within the next few weeks.
“The fact that the economy is still contracting despite the huge amount of policy stimulus supports our view that the recovery will be a long, slow process,” said Vicky Redwood of Capital Economics.
“The economy now looks unlikely to grow by more than 1 per cent at best next year. Similarly, with a huge amount of slack still building, we continue to think that deflation is a key risk.”
Business groups expressed disappointment that modest signs of improving confidence in the manufacturing and service sectors were not reflected across the economy. “This reinforces the CBI’s view that recovery, when it comes, will be fragile and volatile,” John Cridland, deputy director-general of the employers’ organisation, said.
Declines in distribution, hotels and restaurants made the largest contribution to the fall in growth.
The sharp fall in industrial output, which was deeper than the 0.5 per cent decline seen in the second quarter, came amid a particularly rapid 3.5 per cent contraction in mining and quarrying.
Construction also showed an accelerated decline in the third quarter, with output falling 1.1 per cent compared with a 0.8 per cent drop in the second quarter.
Much of the decline came from a sharp fall in distribution and from wholesale, which some economists took as a sign that destocking might have been more of a drag than expected.
“The primary culprit still seems to be firms destocking, which shows up in distribution from the output side of the accounts. This recession has seen the sharpest destocking ever seen in a
recession,” said Karen Ward, economist at HSBC.
One of the main risks to recovery is that as over-indebted individuals, businesses and banks – and, ultimately, the government – seek to reduce debt levels, the fall in demand may mean that growth will not return at a fast enough pace to reduce unemployment.
The National Institute for Economic and Social Research expects that although growth may be stronger for the next few quarters, there will be intermittent quarters of expansion and
contraction for some time to come.