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UK in recession as economy slides

2009-01-23 06:12:56

The UK is now in recession for the first time since 1991, official government

figures have confirmed.

Gross domestic product fell by 1.5% in the last three months of 2008 after a

0.6% drop in the previous quarter.

That means that the widely accepted definition of a recession - two consecutive

quarters of falling economic growth - has been met.

It represents the biggest quarter-on-quarter decline since 1980, and a 1.8%

fall on the same quarter a year ago.

The worse-than-expected contraction sent sterling to a 24-year low against the

dollar, with one pound buying $1.3612.

Meanwhile the FTSE 100 index fell almost 2%, below 4,000 points.

'Broad-based decline'

The figures, from the Office for National Statistics (ONS), showed that

manufacturing made the largest contribution to the slowdown, contracting by

4.6% after a 1.6% per cent decrease in the previous quarter.

However almost all elements of the economy shrank, the ONS said.

The fall in GDP was slightly steeper than most analysts had been expecting,

said the BBC's economics editor Stephanie Flanders

"These figures suggest that it's not going to be done by Christmas," she said.

The downturn was "broad-based" our economics editor added, saying that the

bleak manufacturing data ended "any prospect of this being a white-collar

recession that would largely escape manufacturers ".

'Grim'

What started as a crisis in the financial sector continues to infect the wider

economy.

Unemployment is accelerating sharply, with 1.92 million people now out of work,

the housing market remains severely depressed and retail sales are weak, though

December figures were better than expected, growing by 1.6%.

"It is difficult to see why things should improve in the foreseeable future,"

said Andrew Smith, chief economist at KPMG.

Neil Mackinnon, chief economist at ECU Group, said the GDP figures were "grim"

and underscored the depth of the recession.

"There are no green shoots of recovery, no light at the end of the tunnel," he

added.

The average recession in the UK since 1955 has lasted three quarters, but the

past two recessions have lasted for five.

In fact, many forecasters believe a recession could stretch into 2010 and be as

severe as that of the early 1990s.

Deteriorating picture

GDP is the most commonly used indicator of national income.

It attempts to measure the sum of incomes received by the various

wealth-creating sectors of the economy, from manufacturing and retail to

agriculture and service industries.

The consensus forecast for 2009 as a whole is now for a 2.1% decline in GDP.

As recently as December, the forecast was for a drop of 1.5%.

This highlights the rapidly deteriorating economic picture over recent weeks,

during which a number of the UK's best known high street retailers, such as

Woolworths and Zavvi, have gone into administration.

As well as its low against the dollar, the pound has slumped against the euro

and many analysts believe that parity is now inevitable.

International investors are said to be losing confidence in the UK economy and

the government's attempts to kick-start lending from the banks.

The official government forecast is for the economy to shrink between 0.75% and

1.25% in 2009, although the Chancellor Alistair Darling has indicated that he

will revise this figure in the Budget.

Injection

Efforts to prevent the recession deepening have been widespread, though critics

say they have not gone far enough.

The Bank of England has aggressively cut interest rates to 1.5% - aimed at

driving down the cost of lending and making it easier for consumers and

businesses to access credit.

However, banks have been reluctant to lend sufficiently, despite a 37bn

injection into major banks, and a scheme to offer insurance to banks against

potential losses on risky loans.

A temporary cut in value added tax (VAT), from 17.5% to 15%, was an attempt to

encourage consumers to spend and boost the retail sector and wider economy.