Consumer spending falls at fastest rate since 1980

ONS confirms GDP fell 1.9% in the first three months of the year, with only government spending continuing to grow

• Julia Kollewe
• guardian.co.uk, Friday 22 May 2009 11.45 BST
• Article history

UK households are cutting back on spending at the fastest rate since 1980, contributing to the worst economic slowdown in three decades.

Figures from the Office for National Statistics (ONS) showed consumer spending fell by 1.2% in the first three months of the year. People spent less on housing, household goods and services, while those who went on holiday abroad also spent significantly less.

Consumers tightened their belts in the face of job losses, pay cuts or freezes and sharply reduced City bonuses. The figures showed employees' compensation falling by 1.1% in the quarter, the largest fall since records began in 1955. Wages and salaries declined, with lower bonus payments in the financial sector than normal, while employment also fell.

The data was released as part of the ONS's latest assessment of the UK economy, which confirmed that gross domestic product shrank by 1.9% in the first quarter, its sharpest decline since 1979. GDP stood 4.1% lower than a year ago, the biggest annual fall since 1980.

The figures also showed that business inventories suffered their biggest fall in half a century, taking City economists by surprise and underlining the severity of the recession. Only government spending made a positive contribution to the economy, growing by 0.3% in the first quarter.

Yesterday, Britain suffered a downgrade of its economic outlook by Standard & Poor's, which means it could lose its cherished top-tier credit rating. The ratings agency expressed alarm about the country's ballooning budget deficit and switched its outlook from "stable" to "negative".

"The breakdown of first-quarter GDP gives a pretty grim picture of weakness right across the economy in the early months of this year," said Jonathan Loynes of Capital Economics.

"With key components like household spending and investment set to fall considerably further in response to the weakness in the housing market, the labour market and bank lending, we remain unconvinced that recent 'green shoots' will translate into a return to decent growth next year."

Inventories shrink, but serious obstacles remain

Faced with a slump in demand, companies ran down stocks at an unprecedented rate in the first quarter. Inventories fell by £6bn, the biggest decline since records began in 1948, with big falls in the car and construction industries. This contributed 0.6 percentage points to the quarterly decline in GDP.

Firms also cut investment to save money. Business investment fell by 5.5% in the quarter.

With world trade collapsing, British exports and imports fell sharply. Exports of goods such as cars dropped 8.3% in the quarter, while imports dropped 8.2%.

Exports of services were down 3%, mainly due to financial and insurances services and royalties.

The grim economic picture prompted a warning from the Economist Intelligence Unit today.

It said the most "brutal" slump in Britain since the Great Depression would prolong the property downturn for up to two more years and see unemployment rise to close to 11% by its peak in 2011.

Most economists think the first quarter marked the low point in the recession, although recovery is likely to be slow.

"From here on, the slower pace of destocking will help output in the coming quarters," said Philip Shaw, the chief economist at Investec. "We remain hopeful that GDP will be able to rise again later this year, probably in the third quarter."

Howard Archer of IHS Global Insight said: "There are mounting signs in the latest data and surveys that the rate of economic contraction has moderated appreciably so far during the second quarter.

"Nevertheless, serious obstacles to economic recovery remain and we suspect that further, albeit much more modest, contraction will occur over the rest of the year."