UK economy shrinks 1.5 pct in Q4, Q3 revised down

LONDON - Britain’s economy shrank an unrevised 1.5 percent in the last three months of 2008, surprising analysts who had expected a small downward revision but third quarter figures were altered to show a bigger drop.

By (Reuters)

Published: Wed 25 Feb 2009, 7:55 PM

Last updated: Thu 2 Apr 2015, 3:58 AM

Wednesday’s official second estimate of gross domestic product confirmed Britain entered a steep recession at the end of last year which economists expect to persist for some time.

Households cut spending at the swiftest rate since 1991, manufacturers saw their worst quarter since 1974 -- when Britain was forced into a three-day week due to energy shortages—and the dominant services sector hasn’t done as badly since 1979.

Analysts found some solace in the unrevised headline figure—still the biggest quarterly fall in GDP since 1980 -- and that a big drop in stocks accounted for much of the decline.

“Make no mistake, the demand side of this report is recessionary with a capital R,” said Malcolm Barr, an economist at JP Morgan. “But there is reason to think the intensity of declines will begin to fade as stock levels fall to a position firms believe is more sustainable.”

Third quarter output was revised down to show a 0.7 percent drop on the quarter, from a 0.6 percent fall reported before.

That left growth for 2008 as a whole at just 0.7 percent—the weakest rate since 1992 and a marked deceleration from the 3 percent expansion in 2007.

Some experts think Britain will fare the worst of the world’s biggest economies this year, not least because of its dependence on financial services which have been pummelled by the credit crunch.

However, some larger economies took a bigger hit at the end of last year. In the three months to December, Japan suffered a 3.3 percent drop in GDP—the biggest since 1974 -- and Germany’s economy shrank by a record 2.1 percent.

The United States, the world’s biggest economy, contracted at its fastest pace in nearly 27 years in the fourth quarter.

Less optimistic

The Bank of England—and the government—are hoping for a turnaround towards the end of this year following 4 percentage points in interest rate cuts to a record low of 1 percent and a 20 billion pound ($29 billion) fiscal stimulus package.

Others are less optimistic.

“The more timely surveys suggest that GDP has continued to contract at a quarterly rate of at least one percent at the start of this year,” said Vicky Redwood at Capital Economics.

“Overall, then, the economy still looks set to contract by around 3 percent this year—and we think a further fall in 2010 is likely too.”

British households cut expenditure by 0.7 percent in the fourth quarter, the Office for National Statistics said, the largest drop since the second quarter of 1991.

Manufacturing and production output figures were revised down sharply, to show the biggest falls for both since 1974, when the government imposed a three-day working week because of energy shortages.

However, the fall in output in the more dominant services sector was revised up slightly, but still marked the sharpest decline since 1979.

The BoE is expected to embark on an unprecedented voyage into quantitative easing, whereby the central bank uses newly created money to buy assets in an effort to boost demand when interest rates near zero or rate cuts stop working.

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