UK economy shrinks at faster pace

Consumer spending dropped sharply in 2008 as the financial crisis took hold

The UK economy shrank even more than expected in the last three months of 2008, revised official figures show.

The Office for National Statistics (ONS) said the economy shrank by 1.6% compared to the third quarter.

That was the biggest fall in GDP (gross domestic product) since 1980 and more than an earlier 1.5% estimate.

The figures have also revealed a large jump in the proportion of household income that is being saved, producing the highest "savings ratio" since 2006.

Rising savings

The savings ratio surged from a negative number in the first quarter of 2008 to almost 5% by the end of the year, as people put aside money for hard times.

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The jump was particularly strong in the last three months of the year.

"On the face of it this rise is good news - it means that a large portion of the necessary rebalancing of the economy away from spending and towards saving has occurred already," said George Buckley, an economist at Deutsche Bank.

Household behaviour has clearly been changing.

A regular survey carried out by National Savings & Investments (NS&I) showed that people are now saving an average of £90 a month, up from £87 a month during 2008.

The savings ratio has also been boosted by people borrowing less, with a slump last year in new mortgages, and consumers reining in their spending on credit cards and other types of borrowing.

A series of interest rate cuts by the Bank of England in the past year, taking rates to a record low, has dramatically lowered the cost of some mortgages.

Shrinking economy

"Income from falling mortgage interest payments may particularly being saved," suggested Vicky Redwood, UK economist at the consultancy Capital Economics.

For the year as a whole, the UK economy grew 0.7%, which was unrevised. The GDP growth rate has fallen sharply from 2007, when the UK grew at 3%.

Analysts are expecting the UK economy to shrink in 2009 as whole.

Household expenditure fell by 1%, and all the major sectors of the economy contracted.

The main reason for the weaker growth was a slump in output of the construction sector. It fell 4.9% over the quarter, revised down from the initial estimate of 1.1%.