Economy shrinks even faster than expected in another blow to No 10

By Sean O'Grady, Economics editor

April 25, 2009

The recession is intensifying at an alarming rate, putting the British economy on the way to the worst slump since at least the Second World War.

The Office for National Statistics announced yesterday that the economy shrank by a further 1.9 per cent during the first three months of this year. Over the past 12 months, it has contracted by 4.1 per cent, compared with recent growth of about 3 per cent in a good year.

The announcement comes just days after the Chancellor Alistair Darling said in his Budget statement that he expected the economy would contract "by a similar amount" to the 1.6 per cent slide seen in the last three months of 2008. He has forecast a 3.5 per cent contraction this year, with growth returning in 2010, to increasing derision.

Vicky Redwood, a UK economist at Capital Economics, said the figures dealt "an instant blow for the Chancellor's forecast of a 3.5 per cent drop in GDP this year. For that to be achieved, GDP would have to be broadly flat from the second quarter on, yet the surveys are already pointing to another fall of 1 per cent or so in the second quarter".

Ministers remained unfazed. Yvette Cooper, Chief Secretary to the Treasury, declared: "We set out our forecasts on Wednesday and those are the forecasts we believe are right for this year."

The result was much worse than City expectations and led to renewed suggestions that Government tax revenues will be even lower and borrowing even higher than the £175bn forecast by Mr Darling for next year. There are fears that the sheer scale of borrowing may push market interest rates higher, frustrating the Bank of England's efforts to reduce the cost of credit to businesses and house buyers. That could choke off any modest recovery.

However, in the "real economy", there were requests for more official action. Chief Economist at the British Chambers of Commerce, David Kern, said: "This decline is much worse than expected. The fall in activity indicates that measures to fight the recession so far have not been enough. Support announced in the Budget will have to be supplemented by more aggressive steps to prevent the loss of jobs. Fears of inflation must be set aside until the deepening recession is curbed."

Almost every sector of the economy showed a decline in activity, with manufacturing badly hit, down 6.2 per cent on the quarter, including the halving of car production in the year to March. Few doubt that unemployment will reach three million by next year.

Some City economists sought solace in the steepness of recent falls. Colin Ellis, of Daiwa Securities, said: "Today's data serve as a rude awakening to anyone who dreaming of an eventual recovery. Despite this, though, if so much of the adjustment in the economy has already come through, maybe less is required going forwards."

The scale of the damage to the economy in lost output, lower living standards and poorer public services is historic. The UK has felt its worst quarterly fall in output since 1979, the worst six months since 1955, and the worst manufacturing fall since records began in 1948. According to forecasters CEBR, 2009 will also be the worst year for the economy since 1931, when Britain was on the brink of the Great Depression.