Page last updated at 09:48 GMT, Friday, 22 May 2009 10:48 UK

Biggest spending drop since 1980

Sterling notes
The ONS said the drop in GDP was the worst since 1979

The output of the UK economy fell by an unrevised 1.9% in the first three months of 2009, new figures from the Office of National Statistics show.

However, spending by households fell by 1.2%, the biggest drop since 1980.

The only sector of the economy making a positive contribution to growth was government spending.

The figures also suggest the decline in manufacturing output was less steep than previously thought, down 5.5% rather than the earlier figure of 6.2%.

The figures, which provide more detail about the UK economy than the first estimate of GDP, published in April, show the broad-based nature of the recession.

We remain unconvinced that recent 'green shoots' will translate into a return to decent growth next year
Jonathan Loynes, Capital Economics

As well as the big fall in manufacturing - still the largest quarterly fall since records began in 1955, despite the revision -the service sector, which makes up the largest part of the economy, fell by 1.2%, while construction output fell by 2.4%.

On a year-on-year basis, the UK economy is 4.1% smaller than it was in the first quarter of 2008.

Earnings hit

The figures also suggest that the recession is having an immediate and unprecedented effect on wages.

As well as the decline in household spending, the figures show that compensation for employees (wages and salaries) fell by 1.1% in the quarter, the largest decline on record.

This week, Honda workers approved a pay cut of 3% in order to save jobs.

Earlier figures showed that average earnings, including bonuses, were flat in April.

Jonathan Loynes of Capital Economics said the broad-based decline in output signified that the economy was likely to be weak for some time.

"With key components like household spending and investment set to fall considerably further in response to the weakness of the housing market, the labour market and bank lending, we remain unconvinced that recent 'green shoots' will translate into a return to decent growth next year," he said.

He says that he expects UK GDP to decline by 4% for the year, in line with the forecast by the IMF, but weaker than the chancellor's forecast for a drop of about 3.5% in GDP.

Hope for the future?

One striking figure was the decline in inventories, the stocks of goods held by factories and stores.

These fell sharply, contributing nearly one-third (0.6%) to the total drop in quarterly GDP.

This could lead to a revival in production later in the year, as firms have to restock.

In addition, the weak pound could boost exports and raise demand for UK goods in the future.

The pound has fallen by more than 25% against Britain's main trading partners.

"The good news is that it is looking highly likely that the first quarter will have marked the deepest rate of contraction in this recession," said Howard Archer of IHS Global Insight.

"Sharply reduced stocks should help output to pick up relatively quickly when demand improves," he added.

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