UK Economy Shrinks in Q3

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.

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.

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.

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.

UK Economy Shrinks in Q3, Bloomberg
10/23/2009 8:35:16 AM