UK in Record Recession

23/10/2009

First estimates by the Office for National Statistics (ONS) have unexpectedly shown that the U.K. economy is not only still in recession, but that this recession is the longest recession since records began in 1955.

It is the first time UK gross domestic product (GDP measures the total amount of goods and services produced by a country) has contracted for six consecutive quarters, since quarterly figures were first recorded in 1955. However, the figures could still be revised up or down at a later date.

The unexpected decline in the services sector was the key factor behind the drop, with the distribution, catering and hotels sector performing particularly badly.

The UK economy's reliance on the service sector and financial services in particular, may be the reason why it is still in recession while other major European economies: Japan, Germany and France all pulled out of recession in the second quarter and economists expect the United States to have returned to growth in the third.

The worse-than-expected GDP figures are likely to make the Bank of England consider extending its policy of quantitative easing.

The £175bn already announced for the quantitative easing programme will have been spent by next month, so the strength of the third quarter GDP number will be important in deciding whether to extend it.

Indeed, at the Bank's current rate of spending, it is expected to have spent the whole £175bn in the next week. With a new decision not being taken until 4 November, possibly leaving the Bank with a week with no extra cash to pump into the economy.

"Continued intervention - including help for businesses to access finance, and incentives to promote investment - is still needed. Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed."
said David Kern, chief economist at the British Chambers of Commerce.

So what can we expect, well high unemployment is likely to subdue spending on the high street, along with the reversal of last year's temporary VAT cut and consumers looking to pay back debts.

2010 could prove to be almost as difficult as the past two years - especially if fiscal clampdown adds to the burden on the economy and causes a dreaded double-dip recession.
The Ernst & Young Item Club, a respected group of economists, said this week that it sees the UK economy struggling to achieve 1% growth next year and that even with growth in the third quarter it is still too early to declare a recovery.

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