Economy shrinks for first time in 16 years

24 October 2008

The British economy has shrunk for the first time in 16 years, putting the UK on the brink of a recession.

Official figures show that Gross Domestic Product (GDP) – the official measure an economy’s health – fell by a "shocking" 0.5% between July and September, following 0% growth during the previous three months.

The definition of a technical recession is two quarters, or six months, of negative growth. If the economy remains in negative territory for the last three months of 2008 (and economists believe it will) then the UK will classed as being in a recession.

The construction industry took a particular hit during the third quarter, with output down 0.8% compared with a fall of 0.5% in the previous quarter. However, manufacturing made the largest contribution to the slowdown, falling by 1% compared with a fall of 0.9% in the previous quarter.

Mining and quarrying also fell by 0.7%, electricity, gas and water output decreased by 1%, and services decreased by 0.4% compared with growth of 0.2 per cent in the second quarter.

Hotels and restaurants made the largest contribution to the deceleration in growth to the services sector.

Vicky Redwood, UK economist at Capital Economics, describes the 0.5% fall as "truly shocking".

"The fact that a recession is already underway isn’t a surprise – even Mervyn King and Gordon Brown referred to it earlier this week. But the fact that output has shrunk so much so early on in the downturn is clearly worrying," she adds. "We expect the economy to contract for around two years in all, with a peak to trough drop in output of 1.5% or even more."

George Osborne, the shadow chancellor, agrees the figure is worse than expected.

"It shows that millions of British families are in for a very difficult time in the months ahead," he says. “Sadly it will be millions of families, pensioners and companies that will pay the price for Labour's failure to prepare for this moment."

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