Economy shrinking faster than expected

23 December 2008

The British economy shrunk by 0.6% in the third quarter of this year.

The Office of National Statistics previously estimated that Gross Domestic Product (GDP) – the official measure of economic growth – contracted by 0.5% during the period.

But falling manufacturing output has led the ONS to revise this forecast, meaning the economic downturn is worse than previously thought.

Two consecutive quarters of negative economic growth are generally used to indicate a recession.

Jonathan Loynes, chief European economist at Capital Economics, says: "With GDP shaping up to fall by as much as 1% or more in quarter four – providing a very weak platform for next year - we now expect the economy to contract by around 2.5% in 2009."

Meanwhile, figures from the British Bankers’ Association show mortgage lending fell sharply in November, with just £2.9 billion home loans approved during the month. In contrast, lending was £3.3 billion in October and the previous six-month average was £3.5 billion.

At the same time, the amount of money deposited rose by £3.9 billion – up 4.2% on the year.

David Dooks, statistics director at the BBA, says the sharp fall in borrowing is a perverse reaction to lower Bank of England interest rates.

“The 1.5% November reduction in base rate caused lenders to re-assess product ranges and borrowers to reconsider future borrowing costs, so consequently there was another drop in market activity,” he explains.

“Volumes of mortgage approvals reached new lows and, with house prices still falling, the encouragement of lower costs had not filtered through by the month-end, largely because people remain concerned about the impacts of the rapidly slowing economy on their personal finances.”

Dooks attributes the increase in saving deposits to the collapse of the Icelandic banks, with people moving their nest eggs into high street banks. The ONS also reports a slight rise in household savings, and this trend is expected to pick up pace next year as falling house prices and rising unemployment stop people spending.

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