UK economic downturn accelerates

The recession in the UK economy in the three months to September was worse than previously thought, official data out on Tuesday showed, underlining the speed of the downturn.

Gross domestic product shrank by 0.6 per cent between the second and third quarters of this year – the worst performance since the end of 1990 – the Office of National Statistics reported.

That compares with an earlier estimate that the UK economy had contracted by 0.5 per cent in the quarter, and is worse than the consensus view of economists who had expected GDP to remain unrevised.

The pound, which has moved closer to parity with the euro in the last week, came under renewed pressure following the release of the revised figures.

Economists and policymakers are widely in agreement that the UK is in recession, as after the flat growth in the second quarter, and sharp contraction in the the third, economic data suggests that the economy has continued to decline in the final three months of the year. The consensus forecast of economists is for the economy to shrink by a further 1.5 per cent next year.

The third quarter contraction in the economy was led by a 1.4 per cent drop in the output of the production industries, including a 1.6 per cent drop in manufacturing output.

The household savings ratio – which is the difference between incomes after tax and household expenditures – rose to 1.8 per cent from 1.1 per cent, signalling that spending is weakening.

“The detail showed a slight rise in the household saving ratio … but there is still plenty of scope for it to rise much further – depressing household spending – in response to falling house prices and rising unemployment,” said Jonathan Loynes of Capital Economics.

“On the expenditure side, the breakdown of the GDP was particularly unappealing with consumer spending and investment contracting and exports only edging up despite the weakening pound,” said Howard Archer of IHS Global Insight.

While economic growth was revised down for the third quarter, growth in the final quarter of 2007, and the first quarter of 2008 was revised up by 0.1 per cent. That indicates that the economy was experiencing stronger growth at the start of the year before decelerating later on. In the second quarter economic growth was 0 per cent.

The service sector of the British economy contracted 0.2 per cent in the quarter to the end of October, in the first official measure published on the health of the service industry after the financial crisis deepened in the autumn. The decline is the fourth month in a row that the measure of the service sector over the previous three months has declined, but comes after a drop of 0.5 per cent in the three months to September and was surprisingly strong.

Other data showed that mortgages approved for house purchases sank to just 17,773 in November from 20,767 in October, taking it down to the lowest since the series started in 1997. Mortgage approvals are down 61 per cent compared to the year before.

By Daniel Pimlott, Economics Reporter
Published: December 23 2008 10:38 | Last updated: December 23 2008 10:38

Source: Financial Times

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