UK now in recession

Storm clouds

The UK is officially in a recession, according to data released by the Office for National Statistics.

According to the official figures, the UK’s economy shrank by 1.5% in the
last three months of 2008, following a 0.6% contraction in the previous quarter. A recession is defined of two consecutive quarters (or six months) of negative growth.

Bearish forecasting group Capital Economics says the bigger than expected 1.5% contraction was the sharpest quarterly contraction since 1980. It was also significantly larger than any quarterly fall seen in the 1990s recession, according to the Centre for Economic Business Research (cebr). 

Charles Davis, economist at the cebr, says the size of the contraction is more of a concern than the fact the UK is in a recession. He warns that the UK economy is set for the steepest contraction in the post war era in 2009, with a fall in the region of 3% year-on-year.

The news that the UK is in recession is hardly a bolt out of the blue, with most economists predicting the economy would contract during last three months of 2008. But the question on everybody's lips now is how long the recession will last and just how bad it will get.

How bad is it?

Other figures out this week revealed that the number of people out of work rose by 131,000 between September and November last year to hit 1.92 million - the highest level of unemployment since August 1997.

The number claiming unemployment benefit now stands at 1.157 million – the highest since 2000 – and experts predict this will surpass two million in the latter half of 2009 as companies cut costs as demand falls.

Figures from the Confederation of British Industry (CBI) released yesterday show that UK manufacturers are struggling to cope with a weak pound and falling demand, with production output falling to its lowest level since 1991. Car manufacturers have been amongst the hardest hit, with 90% not working at full capacity.

Ian McCafferty, the CBI’s chief economic adviser, said that manufacturers are planning to cut even more jobs this year, with an estimated 60,000 to go by April. This would take the total number of manufacturing jobs lost in the sector since October last year to 108,000.

“Sentiment and the outlook for the next three months are also very negative,” he said. “Most firms expect conditions to get even worse, with further falls in orders expected, leading to more job cuts. Companies unsurprisingly plan to cut back investment sharply over the next year.”

At the same time house prices continue to fall, mortgage lending is at its lowest level for eight years and the number of people facing repossession is up 92%.

However, there are a few signs of respite for consumers. The cost of living continues to fall and, although inflation is still above target, cheaper petrol prices and discounts in the shops are likely to bring it down further.

Plus, British Gas has announced it is cutting energy bills by 10%, the first reduction since 2007. The move is expected to encourage the other big suppliers to cut energy costs.

And at the start of this week, the government announced a package of initiatives designed to get banks lending to consumers and businesses again. Commentators are cautiously optimistic that the measures will re-start the mortgage market and soften the blow of the recession.

However, equally, there are concerns that banks will restrict lending even further as a recession is traditionally a time to 'batten down the hatches'.

How long will it last?

Prime minister Gordon Brown told BBC Radio 4’s Today programme that the government would "fight the recession with every weapon at it’s disposal" - but added that it’s length would all depend on international co-operation.

"The way to deal with it is common action,” he said. “[We need to] get America, Europe and other countries working in harmony and in tandem, it's something that is happening in every country and continent in the world, and it is spreading to the emerging markets and the developing countries.”

Brown did not give an answer as to how long he thought the recession would last.

Elsewhere, economic experts are equally reticent to give as estimate as to when the recession will be over. 

Andrew Smith, chief economist at KPMG, paints an ominous picture for the year ahead: “Retail sales were extremely weak in December, unemployment is accelerating sharply and, with no sign that the housing market is anywhere near stabilising, it is difficult to see why things should improve in the foreseeable future.”

Hann-Ju Ho, s senior economist at Lloyds TSB, agrees. “We are certainly in the eye of the storm at the moment and all leading indicators suggest that there will be a further contraction in the first three months of this year. As such the UK’s economy will post a negative growth for most of 2009.”

The time it takes for the UK to exit the recession will all depend on the effectiveness of the recent bail-out of the banks by the government, says Ho. “I expect the pace of the contraction to start to slow in the second half of the year, but the measures put in place by the government could lead to a modest recovery by early next year,” he explains.

However, Vicky Redwood, a UK economist at Capital Economics, sees an end in sight - unfortunately, it is a while off: “This recession will last until at least the end of 2010, when we expect unemployment to have hit at least 3.5 million. If the government wants to see a recovery sooner it needs to take even bolder action and force the banks to start lending.”