UK remains in recession
The UK remains in a recession with the economy suffering a further 0.4% contraction between June and September.
The news will be a blow to optimistic economists, who were hopeful that the latest gross domestic product (GDP) figure – which measures economic output – would show the UK had excited the recession and returned to economic health. Some were even forecasting a 0.2% increase in economic output during the period.
In reality, the economy contracted by 0.4% during the third quarter, following a decrease of 0.6% during the previous three months.
The economy has now been shrinking for six consecutive quarters – the longest period of falling economic output since figures began in 1995.
The Office for National Statistics, which published the figure, reports a 0.7% decline in total production during the period, compared to a 0.5% fall in the second quarter. Mining and quarrying made the largest contribution to the decline, falling by 3.5%, compared with a fall of 0.6% in the previous quarter.
There was also an unexpected decline in the services sector - including catering and hotels - which was key to the drop.
However, this is just the first estimate of economic output during quarter three, and could be revised at a later date.
Vicky Redwood, UK economist at Capital Economics, says economic output is now 6% below its peak and, with still no return to growth, predicts a "long, slow" road to recovery.
"The economy now looks unlikely to grow by more than 1% at best next year," she adds. "Similarly, with a huge amount of slack still building, we continue to think that deflation is a key risk."
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.