Recession looms as economy shrinks sharply

Friday, October 24, 2008

The British economy shrank by far more than expected in the third quarter of the year which, barring a miraculous bounce in the current three months, means it is in recession for the first time since the early 1990s. Official data showed gross domestic product contracted by a much-bigger-than-expected 0.5% in the July to September period, the first fall since early 1992 and the biggest drop since the fourth quarter of 1990. Liberal Democrat leader Nick Clegg warned that the UK was "on the edge of a new winter of discontent". "This confirmation that we are heading for a recession puts a name to the fear that many people have been feeling for months," he said. "These growth figures show that the credit crunch is hitting the real economy and harder and faster than was first feared."
Chancellor Alistair Darling, speaking on Sky television, said he was confident the British economy would get through a "difficult period" and reaffirmed the government's commitment to help individuals and businesses. "If we do that I'm confident that we along with other countries will get through this difficult period," he said. But the sharper-than-expected contraction in the economy alarmed the City and sent shares crashing. At one stage, almost £90bn was slashed from the value of the FTSE 100 companies, as the index crashed almost 400 points.
"It's a big shock that the decline [in GDP] is so large. It is truly dire," said Philip Shaw, chief economist at Investec.
The contraction was broad-based with manufacturing and private sector services showing declines while only agriculture and government services showed an increase in output.
The pound slumped on the foreign exchanges on the news, dropping to below $1.55 and to nearly 81p to the euro. Indications were that Wall Street will open sharply lower, perhaps more than 500 points, when trading begins this afternoon. "My comment to traders was 'dive, dive, dive'," said Brian Hilliard, economist at Société Générale in London. "It's a very emphatic entry into recession which underlines the need for very dramatic interest rate cuts which we think the Bank of England will deliver."
James Knightley at ING Financial Markets said: "GDP has plunged far more than expected. So much for Gordon Brown's 'no more boom and bust'." He said he thought there could be at least four quarters of contraction, which would make this recession similar to those of the early 1990s and 1980s. Neville Hill at Credit Suisse agreed: "This is clear evidence that the economy is in recession. Recessions tend to last more than the technical two quarters, so there's likely to be more of this to come."He said it was now possible that the Bank of England's monetary policy committee would cut rates by more than the half a percent expected in the City. That would take the MPC into uncharted territory - it has never moved rates more than half a percent in one direction or the other. It cut rates by half a percent last month in concert with other central banks around the world.


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