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News - 26 October 2008
Alistair Darling MP

Economy shrinks dramatically. UK at the gates of recession.

The economy shrank by half a percentage point last quarter. The first such decline since the last recession ended in 1992 and the largest quarterly decline for 18 years. Manufacturing bears the brunt.

The Office for National Statistics  released figures on Friday revealing that output fell by 0.5% between July and September, which is more than analysts had expected.

The UK will be officially be “in a recession” if the economy continues to contract in the period between October to December (inclusive) delivering two consecutive quarters of negative growth.

The Chancellor of the Exchequer, Alistair Darling, blamed the fall on the credit crunch, falling house prices and rising energy prices, which have resulted in a serious contraction of consumer spending.

UK shares slumped when the news was released and were down 7% during trading in the first part of the day. The pound also weakened, falling to $1.59 – its lowest rate for 5 years.

The services sector, representing three quarters of the UK economy, fell 0.4%. Within the distribition, hotels and restaurants sector, hotels and restaurants saw slight growth but low distribution of cars attributed to the overall decline of 1.7%, compared with an increase of 0.2% in the previous quarter. Manufacturing output fell 1% while construction, which represents 6% of the UK economy, fell by 0.8% compared to the previous quarter.

ECONOMIC PARTNERSHIP COMMENT

The advent of a recession at the end of the next quarter is now a given in the UK economic equation. The only question is how deep it will be and how long it will last with some commentators suggesting it will be longer than the last two recessions which both officially lasted five quarters.

The dire economic situation, which was until recently restricted to banks and government attempts to rescue them, has now taken hold on people’s lives in the real economy and its grip is likely to tighten considerably over the coming months.

As unemployment rises and incomes fall consumers will tighten their belts and turn their minds to saving again (a habit that has all but disappeared in the UK over the past decade - see earlier story) which will further exacerbate the recession.

Falls in Gross Domestic Product (GDP) don’t really mean much to the man or woman on the Mile Oak Omnibus but they will soon translate into failed businesses leading to greater unemployment and re-possessed homes or homes in negative equity and pension funds tumbling. If previous recessions are any guide these consequences will persist long after the “official recession” is over and the UK starts to grow again.

No one can be certain how long or how deep this recession will be but there is some consensus of opinion emerging that the UK economy will show growth of just 1% in 2008, then negative growth of minus 1% in 2009 before returning to a positive figure of 1% in 2010 resulting in a net gain of 1% over the three years.

This is compared to “normal” growth over the past decade of about 2.75%. If this trend had continued we would have expected growth of 8.5% over those three years and this reduction to just 1% translates into a loss of over £100bn.

In the grand scheme of rescue packages to banks that run into hundreds of billions this might not seem disastrous but this is real money taken out of the real economy i.e. shops, restaurants, hotels, travel, entertainment etc etc.

The UK in general, and Brighton & Hove in particular, is better placed to weather the bad times and there are a number of positive national factors that should come to our help in the next few months. The sharp fall in oil from $147 a barrel before the summer to just under $63 now, despite OPEC’s threatened cut in output, should help to bring energy costs down across the board including household gas bills (the prices of which are bizarrely linked to oil).

Interest rates during the last recession touched 15% but they are now a mere 5%. Cuts in interest rates in the next few months are expected to be deep and, if banks can be persuaded or cajoled to pass them on, this should help household incomes. But that is a big “if” and there is still an expectation that banks will keep interest rates high and recall loans early in the new year.

When the Bank of England deputy governor Charlie Bean warns that the pain is just beginning, calling the situation the 'largest financial crisis of its kind in human history' we can probably take him at his word.


Read related items on:
National
Recession
Office of National Statisitics
Darling, Alistair


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