Page last updated at 12:42 GMT, Friday, 23 January 2009

UK in recession as economy slides

A High Street
Bleak retail sales and accelerating unemployment have hit the UK

The UK is now in recession for the first time since 1991, official government figures have confirmed.

Gross domestic product fell by 1.5% in the last three months of 2008 after a 0.6% drop in the previous quarter.

That means that the widely accepted definition of a recession - two consecutive quarters of negative economic growth - has been met.

It represents the biggest quarter-on-quarter decline since 1980, and a 1.8% fall on the same quarter a year ago.

The worse-than-expected contraction sent sterling to a 24-year low against the dollar, with one pound buying $1.355.

Meanwhile the FTSE 100 index fell almost 2%, below 4,000 points.

'Broad-based decline'

The figures, from the Office for National Statistics (ONS), showed that manufacturing made the largest contribution to the slowdown, contracting by 4.6% despite hopes that the weak pound would help exporters.

RECORD QUARTERS
Biggest post-war quarterly decline was -2.6% in Q2 1958
Largest drop in one quarter over previous year was -4.1% in Q4 1980
Worst fall in one quarter on previous year in 1990s recession was -2.2% in Q2 1991

With the exception of agriculture, all elements of the economy shrank from the previous three months, the ONS added.

The fall in GDP was slightly steeper than most analysts had been expecting, said the BBC's economics editor Stephanie Flanders.

"These figures suggest that it's not going to be done by Christmas," she said.

The downturn was "broad-based" our economics editor added, saying that the bleak manufacturing data ended "any prospect of this being a white-collar recession that would largely escape manufacturers ".

'Sad commentary'

Chancellor Alistair Darling said that the figures underlined the scale of the challenges the government faced.

"It's going to be a difficult year for families in the UK. We need to go about the problem with a sense of purpose," he said.

Countries across the globe were facing recession, he added, saying that the crisis could be solved "better and quicker" if other governments also acted to stimulate their economies.

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Shadow chancellor George Osborne accused the government of failing to command confidence at home or abroad.

"With unemployment rising faster than anywhere else, and businesses closing every day, these figures are deeply worrying," he said.

"It's difficult to see how we'll get that confidence with a Prime Minister who blames everyone else for the mess we're in and refuses to acknowledge any mistakes."

And Liberal Democrat treasury spokesman Vince Cable said the situation was "very serious".

"It's a sad commentary on a decade of Labour government that they have succeeded in producing an almost exact replica of the boom-bust cycle we had under the Conservatives."

'Grim'

What started as a crisis in the financial sector continues to infect the wider economy.

Unemployment is accelerating sharply, with 1.92 million people now out of work, the housing market remains severely depressed and retail sales are weak.

Even though December's retail figures were better than expected, growing by 1.6%, this was driven by heavy price-discounting and should be treated "with caution" the ONS said.

We are well into the financial crisis but the economic crisis is only just beginning
Graham Leach
Chief Economist
Institute of Directors

"It is difficult to see why things should improve in the foreseeable future," said Andrew Smith, chief economist at KPMG.

Neil Mackinnon, chief economist at ECU Group, said the GDP figures were "grim" and underscored the depth of the recession.

"There are no green shoots of recovery, no light at the end of the tunnel," he added.

The average recession in the UK since 1955 has lasted for three quarters, but the past two recessions have lasted for five.

In fact, many forecasters believe a recession could stretch into 2010 and be as severe as that of the early 1990s.

The UK economy was heading for a "long cold winter" which was unlikely to end before spring 2010, said Graeme Leach, chief economist at the Institute of Directors.

"The debate on the length and depth of the recession is extremely complex and at this stage one cannot be dogmatic about the outcome," he said.

"The latest recession is beginning to look as if it will be more like the 1980s than the 1990s in terms of lost output. We are well into the financial crisis but the economic crisis is only just beginning."

Deteriorating picture

GDP is the most commonly used indicator of national income.

Four leading economists told the BBC's Robert Peston what signs they will be looking for to signal that the worst is over.

It attempts to measure the sum of incomes received by the various wealth-creating sectors of the economy, from manufacturing and retail to agriculture and service industries.

The consensus forecast for 2009 as a whole is now for a 2.1% decline in GDP.

As recently as December, the forecast was for a drop of 1.5%.

This highlights the rapidly deteriorating economic picture over recent weeks, during which a number of the UK's best known high street retailers, such as Woolworths and Zavvi, have gone into administration.

As well as its low against the dollar, the pound has slumped against the euro and many analysts believe that parity is now inevitable.

International investors are said to be losing confidence in the UK economy and the government's attempts to kick-start lending from the banks.

The official government forecast is for the economy to shrink between 0.75% and 1.25% in 2009, although the Chancellor Alistair Darling has indicated that he will revise this figure in the Budget.

Injection

Efforts to prevent the recession deepening have been widespread, though critics say they have not gone far enough.

The Bank of England has aggressively cut interest rates to 1.5% - aimed at driving down the cost of lending and making it easier for consumers and businesses to access credit.

However, banks have been reluctant to lend sufficiently, despite a 37bn injection into major banks, and a scheme to offer insurance to banks against potential losses on risky loans.

A temporary cut in value added tax (VAT), from 17.5% to 15%, was an attempt to encourage consumers to spend and boost the retail sector and wider economy.

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