Page last updated at 18:15 GMT, Friday, 24 October 2008 19:15 UK

Recession fear as economy shrinks

graph

The economy shrank for the first time in 16 years between July and September, confirming that the UK is on the brink of recession.

Output fell by 0.5%, according to the Office for National Statistics, a bigger-than-expected drop, knocking UK shares and weakening the pound.

The UK will be classed as being in recession if the economy slows in the fourth quarter as well.

The Prime Minister said other countries must play a part fighting the slowdown.

'Once-in-a-lifetime crisis'

"This is a global financial recession and we're fighting it every way we know how," Gordon Brown said.

"But we need other countries to work with us and that's what I'm also spending my time making sure other countries take the action that we're taking to stop this becoming worse."

Gordon Brown says the government is 'fighting' the recession

He said the government was putting more money into people's pockets - including an increase of the winter allowance for pensioners and a 120 tax cut for basic taxpayers.

The fall in UK output has been blamed on the credit crunch, falling house prices and rising energy prices, which have forced consumers to tighten their belts.

Charlie Bean, deputy governor of the Bank of England's rate-setting committee, the MPC, described it as a "once in a lifetime crisis and possibly the largest financial crisis of its kind in human history".

UK shares tumbled further on the news, closing down 5%.

The pound was also affected, falling to $1.52 before recovering to $1.5889 - the first time it has fallen below $1.60 in the past five years.

Shock fall

The 0.5% fall in economic output is far greater than predicted and increases expectations of further interest rate cuts from the current level of 4.5% to ignite growth.

Downturn logo
What's the real impact of the economic slowdown? BBC News is taking the temperature across the UK in a special day of coverage

It is the biggest drop in UK gross domestic product (GDP) since the first quarter of 1990.

The services sector - which represents three quarters of the UK economy - fell 0.4%, the biggest drop in 18 years. Within the services sector, hotels and restaurants saw the biggest fall, down 1.7%, compared with an increase of 0.2% in the previous quarter.

Manufacturing output fell 1% while construction tumbled 0.8% compared to the previous quarter.

Market fear

This is the day that the recession became real
David Cameron MP, Conservative leader

Analysts expressed their shock at the news and their desire for aggressive rate cuts.

Business group CBI said the figures were worse than expected and called for rates to be cut by half a percentage point at the next meeting of the MPC.

"My comment to traders is dive, dive, dive," said Societe Generale's Brian Hilliard.

"It is a very emphatic entry into recession which underlines the need for dramatic rate cuts, which we think the Bank of England will deliver." He anticipated rates dropping to 2.5% by the middle of next year.

Rates could go as low as 3% by the middle of next year and possibly even lower, said UBS analyst Amit Kara. "The risks are that this is going to be a pretty severe recession."

Return to 1990s?

BBC economics editor Hugh Pym said the figures raised fears we could be in for a recession very like the one in the early 1990s when unemployment hit three million.

He said it was unlikely to be just a technical recession (two consecutive quarters of negative growth), but could be a year or so of negative growth.

But the difference now is that interest rates are much lower, he added.

Deputy bank governor Charlie Bean told the Scarborough Evening News that the bank's independence - and ability to set monetary policy - meant that the UK was in a better position than in the early 1990s.

Hard rain

DEFINING A RECESSION
A recession is widely accepted as a decline in a country's domestic economic output or GDP for at least two consecutive quarters

Opposition politicians criticised the government for its handling of the financial crisis.

"Well, this is the day that the recession became real. We've had 10 years of being told no more boom and bust, 10 years of a government not putting aside money for a rainy day. Well that rainy day has now come," he said, calling for more support for businesses," David Cameron, the leader of the Conservatives, said.

The Liberal Democrats called for tax cuts for the poor and more interest rate cuts.

"These growth figures show that the credit crunch is hitting the real economy and harder and faster than was first feared," said Liberal Democrat leader Nick Clegg.

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