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Recession looms as UK economy shrinks

Published 20/10/2008

Britain will officially move closer to its first recession for 16 years this week, leading economists warned yesterday, with the Government set to reveal the first fall in economic output since the second quarter of 1992.

The Office of National Statistics will on Friday, give its first estimate of the UK's economic growth during the third quarter of the year and it is almost universally expected to announce a negative figure.

While the ONS cannot yet officially call it a recession —the technical definition is two successive quarters of negative growth— it has become increasingly clear in recent days that the UK economy has now begun to shrink.

The dire state of the economy underlines why Alistair Darling, the Chancellor, has begun to hint that he will bring forward public spending initiatives in order to boost investment.

However, any increase in spending will cause a further deterioration in the public finances, with the ONS already expected to say today that public sector borrowing reached £7.5bn in September, compared with £4.9bn in the same month last year.

“It would be wrong to start taking money out of the economy, in terms of cutting back on spending, in terms of tax,” he said.

“You do not do this when an economy is slowing down.”

The strategy will necessitate taking on more debt, as the Chancellor has already signalled he is ready to do.

Phillip Shaw, chief economist at Investec, said there was almost no chance of the latest growth figures providing any succour.

“A slump in manufacturing, seemingly now a worldwide phenomenon, means that with data available up to August, industrial production may have tumbled by 1.3 per cent over the third quarter,” he warned.

Howard Archer, chief economist at Global Insight, added: “To all intents and purposes, the UK is now in recession as there can be little doubt that further, and very probably deeper, GDP contraction will occur in the third quarter.”

That projection is broadly in line with the forecast made today by the Ernst & Young Item Club, which expects three more quarters of falling growth. The group's chief economist, Peter Spencer, warned “We have to face up to the fact that in the UK and many other countries we are entering a recession,” Mr Spencer said.

“The next 12 months will be really tough for consumers and corporates – it's far too early to be thinking about any recovery.”

Consumer-facing sectors of the economy, such as retail, are already facing torrid trading conditions. The British Retail Consortium will say today that London stores – which until have now proved more resilient than retailers in most parts of the country – delivered their worst performance for more than three years last month.

The slowdown has now moved well beyond the High Street. Lloyds TSB said today that its surveys of business confidence produced the most pessimistic result in September than in any month since the bank launched the research in 2002. There has been a significant increase in firms in every sector of the economy now expecting their activity to slow over the next year.

Belfast Telegraph

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