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Economists fear a long battle ahead as recovery hopes dashed
Martin Bentham, Home Affairs Editor23 Oct 2009
Hopes of a swift recovery from the recession were dashed today as City economists warned that Britain is now likely to face a longer battle to restore the country to prosperity.
The bleak assessment followed figures from the Office for National Statistics showing that instead of the expected return to growth, the economy contracted by 0.4 per cent between July and last month.
The grim statistic stunned the financial world and there were predictions that the Bank of England will be forced to add £50billion to the £175billion it has already allocated to boost the economy in a move which would worsen national finances.
The value of the pound fell in response to today's figures, although shares rose and there was a glimmer of positive news for homeowners from speculation that interest rates are likely to remain on hold until late next year. The consensus remained bleak, however, as City economists had predicted growth of about 0.2per cent.
Howard Archer, the chief UK economist of IHS Global Insight, said today's figures were "a real shocker" and "desperately disappointing".
He added: "Serious economic and financial obstacles to significant, sustainable growth remain, and we suspect that economic activity will be muted and prone to relapses for some considerable time to come.
"High and rising unemployment, the need for consumers and businesses to improve their balance sheets, and ongoing tight credit conditions amid still-serious financial-sector problems are particularly worrisome.
"On top of this, economic activity will be held back over the medium and longer-term by the need for extended, major fiscal tightening to rein in the terrible public finances."
Jame Knightley, of ING, said the figures were "awful with no positive news" and said that they had increased the likelihood that the Bank of England would be forced to expand its quantitative easing programme by injecting a further £50 billion into the economy. Vicky Redwood, of Capital Economics, issued a similar prediction and added: "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."
The 0.4 per cent contraction takes the total loss of output since the recession began last year to 5.9 per cent. It also means that the UK economy has shrunk for six quarters in a row - the longest period of continuous decline since ONS records began in 1955.
Although modest growth is still expected to return by the end of this year, pressure on the economy will intensify next year as the temporary VAT cut and the car scrappage scheme come to an end. Unemployment is also steadily rising towards three million.
Today's figures showed the pressure on consumers during the three-month period with output from distribution, hotels and restaurants down by one per cent. Overall service output, which represents almost three-quarters of the economy, saw a 0.2 per cent decline.
The construction sector fell 1.1per cent, taking its total contraction since the start of the year to 14.7 per cent. Industrial production output shrank by 0.7 per cent and is down by 13.7 per cent since the recession began.
The statistics could be revised upwards or downwards, but it is unlikely that any positive change would be sufficient to restore the country to growth.
