(GORDON BROWN A COMPLETE FAILURE) Recession fears as economy begins to shrink

Recession fears as economy begins to shrinkBy Edmund Conway, Economics Editor 25/07/2008. Britain's economy shrank in May and June as the worst housing market slump in decades took its toll on the UK, it has emerged. The credit crunch could hit Europe as hard as the US. It is the most conclusive sign yet that the longest run of sustained economic growth since the early days of the Industrial Revolution over three centuries ago is over.

The Office for National Statistics reported that Britain's gross domestic product grew by only 0.2pc in the second quarter - the slowest quarterly growth for three years.

With the annual GDP growth rate now down from 2.3pc in the first quarter to just 1.6pc in the second, the Chancellor's optimistic 1.75-2.25pc forecast for growth this year looks effectively unattainable, economists said.

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They also warned that the figures showed that although strong growth in April helped keep the overall quarterly growth rate in positive territory, GDP actually shrank in May and June, by 0.2pc and 0.3pc respectively. This underlines the likelihood that Britain is now skating close to a period of contraction, according to Geoff Dicks of Royal Bank of Scotland.

"On our estimates a rise of fractionally more than 0.1pc a month between July and September would be enough to avoid a quarter of negative growth though, on the trend of the last two months, you would not bet on it. After an unbroken run of 64 quarters, the first negative quarter since 1992 appears to be under way."

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A number of economists changed their forecasts following today's statistics to reflect the likelihood that Britain suffers a technical recession - where GDP shrinks in two successive quarters.

Paul Dales of Capital Economics, said: "An outright recession is now our central scenario. With industrial production having fallen in both the first and second quarters, industry is already in recession.

"Looking ahead, the more up-to-date surveys suggest that in Q3 so far, overall economic growth has ground to a complete halt."

Interest rates will eventually need to fall, he added. "The recent drop in the oil price and the price wars on the petrol forecourts support our view that the next rate cut could come late this year, but this will be too late to prevent a recession," he said.

The ONS figures show that a sudden dive in construction output during the quarter, fuelled by the difficulties in the commercial and residential property markets, pulled down the overall growth rate. But although the annual growth rate of the services sector, which accounts for around three-quarters of UK economic output, hit the lowest level since 1992, it actually picked up slightly compared with the previous quarter.

With figures earlier this week suggesting that a number of eurozone countries are now skirting close to a recession, the UK data will confirm suspicions that Europe may suffer as serious a blow, if not more severe, from the credit crunch than the United States. The National Institute for Economic and Social Research warned yesterday that Britain faces three years of "anemic" growth, though it ruled out the likelihood of a recession.

The weak growth figures may raise the chances that the Bank of England cuts interest rates in the coming months, though a reduction is unlikely before the winter, economists said.

Markets were shaken earlier in the week by the news that Monetary Policy Committee member Tim Besley voted for a rate increase to 5.25pc at the Bank's meeting at the start of the month. The Bank is expected to give a clearer indication of its future plans in its Inflation Report next month.