Economists rule out green shoots of recovery

30 June 2009

The beleaguered UK economy suffered its biggest contraction since 1958 in the first quarter of the year, according to revised figures.

Gross domestic product (GDP) growth - the official measure of economic health - fell by 2.4% between January and March, a significantly larger drop than the 1.9% initially estimated. Economists were expecting a revised drop of 2.1%.

Weaker output in the construction and service sectors led to the worst quarterly contraction for more than 50 years. Revised figures for activity in the construction sector, which accounts for almost three-quarters of output, meanwhile revealed the worst quarter on record with a 1.6% decline.

The latest contraction in GDP is close to the total loss in output seen in the 1990’s recession, according to David Page, economist at Investec Securities.

However, the Office for National Statistics (ONS) says the extremely large revision was partially due to changes in the methodology for calculating construction data services output. This contributed roughly 0.25% point to the revision.

Green shoots?

Howard Archer, of IHS Global insight, says: “The deeper contraction in GDP in the first quarter is obviously unwelcome news, but it is also old news and matters have moved on appreciably since then."

Archer points out that economic activity is currently looking more positive.

Nonetheless, the figures deal a blow to government forecasts of economic recovery this year as they pull the annual rate of decline down from 4.1% to 4.9% - the largest decline since records began in 1948.

Economists at Capital Economics say the average GDP contraction in 2009 now looks to be 4% - or at the very least weaker than the 3.5% previously anticipated.

Chief European economist Jonathan Loynes explains: “The [latest] figures clearly leave an even weaker platform for growth this year."

Page adds: "We still forecast [economic] growth returning in the third quarter of this year. However, our total GDP forecast for 2009 is now down around 4% after these revisions."

In his April Budget, chancellor Alastair Darling forecast a 1.6% contraction in the UK economy during the first three months of the year. The Treasury also predicted that the UK would shrink by 3.5% this year before returning to growth of around 1.25% next year.

Those projections are increasingly looking overly optimistic. Last week the Organisation for Economic Co-operation and Development predicted that the UK economy would shrink by 4.3% this year with zero growth in 2010.

The ONS also says that the recession actually began in the second, rather than the third quarter of 2008. The struggling UK economy saw a 0.1% decline between April and June last year compared with previous estimates of zero growth.

Barclays Capital Research says the latest figures mean any recent 'green shoots' reflect a rebound from the sharp fall in activity seen last year rather than a recovery. 


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