UK economy still in the dumps

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Record recession for UK economy

The UK economy unexpectedly contracted by 0.4% between July and September, according to official figures, meaning the country is still in recession.

It is the first time UK gross domestic product (GDP) has contracted for six consecutive quarters, since quarterly figures were first recorded in 1955.

But the figures could still be revised up or down at a later date, because this figure is only the first estimate.

GDP measures the total amount of goods and services produced by a country.

The pound fell sharply after the figures were released, reflecting the fact that many observers had expected the UK to have grown during the quarter.

It was down 1.7% against the dollar, at $1.6323, and down 1.9% against the euro, at 1.0859 euros.

Quarterly growth of 0.2% had been expected in the figures from the Office for National Statistics (ONS), although expectations had been tempered by recent figures showing no growth in retail sales in September, and a 2.5% decline in industrial output in August.

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 when partners such as France and Germany exited in the second quarter of this year.

The economy contracted 5.2% compared with the same period last year, which was marginally better than the record figure of 5.5% in the previous three months.

It has now contracted 5.9% from its peak before the recession began.

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

Quantitative easing is the central bank's policy of printing money and using it to buy bonds from banks and other companies to help stimulate the economy.

'Awful'

The £175bn already announced for the quantitative easing programme will have been spent by next month, so 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.

As the next Monetary Policy Committee (MPC) meeting, at which quantitative easing decisions are taken, is not until 4 November, that would leave it with a week with no extra cash to pump into the economy.

The figures were "awful with no positive news" according to James Knightley at ING.

"This clearly suggests that the likelihood of an expansion in quantitative easing by £50bn or so over the next quarter is rising, although [it] is not a foregone conclusion."

Former MPC member Professor David Blanchflower said the negative GDP figures should not have been a surprise.

"There's been very little sign among firms that things were very much better," he told the BBC.

"The public seems to have some more confidence - they seem to have believed the talk about green shoots, but actually the data haven't really looked that way at all."

Intervention needed

Analysts said it is worrying that the decline has continued despite the stimulus measures that the government and the Bank of England have introduced.

"Continued intervention - including help for businesses to access finance, and incentives to promote investment - is still needed," said David Kern, chief economist at the British Chambers of Commerce.

"Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed."

'Deeply disappointing'

Chancellor Alistair Darling said he had never expected to see growth before the end of 2009.

"Our job is to support the economy as we come through towards recovery," he said.

"[Growth] will come - I'm confident about that - and I'm confident that businesses and people generally will begin to see a difference, but it will take time."

Shadow chancellor George Osborne described the figures as "deeply, deeply disappointing".

"There are many millions of people who will be deeply concerned to see that Britain is still in recession six months after France and Germany came out of recession," he told the BBC.

"It destroys the myth that Britain was better prepared."

Liberal Democrat Treasury spokesman Vince Cable said the figures were "a cold blast of realism".

"We've had a lot of talk recently based on a booming stock exchange and prices of luxury houses in London that somehow this problem was at an end, and it isn't," he said.

One of the measures expected to be a particular help in the final quarter of the year is the change in VAT.

The rate of VAT is due to return to 17.5% from 15% at the beginning of January and consumers are expected to step up their purchasing ahead of that increase.

Source: BBC News