UK economy shrinks in third quarter

Published:  23 October, 2009

LONDON: Construction output in the third quarter this year dropped a further 1.1%. The UK economy shrank by 0.4 per cent in the third quarter. From a peak in the first quarter of 2008, the economy has now contracted by 5.9%, the Office for National Statistics reported.

The recession has now lasted for six quarters, the longest downturn since the second world war and on a par with that of 1979-81.

The data shocked economists who predicted growth to return in the quarter raising fears that the UK may be facing a deeper and more prolonged downturn. The economies of France, Germany and Japan started growing again in the second quarter and the US looks likely to have started growing again in the third quarter.

"The fact that the economy is still contracting despite the huge amount of policy stimulus supports our view that the recovery will be a long, slow process," said Vicky Redwood of Capital Economics.

"The economy now looks unlikely to grow by more than 1 per cent at best next year. Similarly, with a huge amount of slack still building, we continue to think that deflation is a key risk."

Construction also showed an accelerated decline in the third quarter, with output falling 1.1 per cent compared with a 0.8 per cent drop in the second quarter.

Much of the decline came from a sharp fall in distribution and from wholesale, which some economists took as a sign that destocking might have been more of a drag than expected.

"The primary culprit still seems to be firms destocking, which shows up in distribution from the output side of the accounts. This recession has seen the sharpest destocking ever seen in a recession," said Karen Ward, economist at HSBC.

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