TELEGRAPH 24.10.09
This recession just became a depression
By Edmund Conway
It is difficult to know what to be most shocked by in the gross domestic product figures published by the Office for National Statistics this morning: the fact that we are in the longest-lasting deepest continuous recession in recorded history or that no-one in the City foresaw it*.
Leaving aside the City�s failings, with which we are intimately familiar, the scale of the economic collapse is disturbing. The National Institute for Economic and Social Research has been calling this a �depression� rather than a recession for some time � these figures surely now underline such a description.
A brief look at the figures beneath the headline figure of a 0.4pc fall reveals that almost all parts of the economy � from industry and manufacturing to services to construction to transport suffered significant contractions. Only the government managed to keep its economic output from falling, stagnating during the quarter thanks to extra health spending (swine flu-related I wonder?).
The GDP fall, as you may have seen elsewhere, means that this is now the longest technical recession since at least 1955 (and most probably since the 1930s, though the ONS doesn�t have figures on this) at six quarters, or a year and a half, long. The late 1970s/early 1980s slump was deeper, but was not a long uninterrupted period of economic output falls.
Either way, though, the difference is academic. So far, the UK economy has contracted by 5.9pc, compared with an overall slide of 6pc in the early 1980s. But this time around, the recession was far faster than the last few ones, as evinced by this chart from the ONS themselves (though bear in mind the 1980s line doesn�t include a couple of quarters of contraction in 1979).
Anyway, as I see it there are a few important instant takeaways from the figures this morning:
1. It shatters any delusions that Britain is �well placed� to withstand the recession, as claimed by Gordon Brown. The fact is that the Government and the Bank of England have, together thrown more stimulus at the economy than in almost any other previous downturn, and still not averted this horrendous decline. The fact is now that the UK will come out of recession significantly later than most other Western nations. For more on where our fellow countries are, check out this [the?] useful primer by my colleague Harry Wallop.
2. This significantly raises the likelihood that the Bank of England will have to extend its quantitative easing (QE) programme beyond the �175bn ceiling it has currently laid out. Given that the Bank (which meets and decides on this the week after next) has already done more in terms of QE than any other central bank in the developed world, the significance of this cannot be underplayed.
On this front, here�s Malcolm Barr from JP Morgan: �Given this morning�s news, we are revising [our forecast] to anticipate a �50bn extension� The MPC was already concerned that the prospective recovery in output would be insufficient to begin to absorb slack and prevent an inflation undershoot: those concerns will be heightened by this morning�s data, even given the potential for upward revision.
3. A revision is possible. These first estimates comprise are around 60pc forecast and 40pc actual hard data collected by the ONS, so inevitably involve a certain amount of error possibility. But then the average amount by which first estimates are ultimately revised is historically only around 0.2pc, so unless there is a really big miscalculation by the ONS, I wouldn�t hold out for these figures to be revised later into positive territory.
Which leaves us with the question of why the City got it so wrong. According to Reuters, the average forecast among City economists ahead of these figures was for growth of 0.2pc. The short answer is that the analysts were wrongfooted by other surveys, which had indeed suggested that the recession had come to an end. In particular, the Purchasing Managers� Indices for both manufacturing and services, which had been pretty accurate in pinpointing the start of the recession, were screaming out that the contraction was over. Perhaps they are less reliable when it comes to predicting recoveries than slumps. The truth, though, is that the official data, which is based less on surveys than actual hard statistics, has been weak in recent months, whether it is for retail sales or manufacturing.
Although it is fashionable to pin all the blame on the economists, I admit that these figures took me rather by surprise too. I had assumed for a while that the weak pound would have helped boost the economy more than it appears to have. The fact is it seems as if the sheer force of the credit crunch and financial crisis has been so overwhelming in the UK that even the oomph of a devaluation and quantitative easing has failed to prevent a terrific recession.
I am putting together some more analysis and we�ll have a load of coverage in the paper tomorrow.
* I say this, but, spookily, my colleague Angela Monaghan revealed this morning, before the release, that she dreamt last night that there would be a 0.4pc contraction. We now fear she will shortly be recruited to the City to replace the economists who got it so wrong.
2. Britain's hopes of escaping recession dashed
A surprise drop in gross domestic product last quarter leaves Britain mired in its worst recession on record.
By Angela Monaghan
The economy unexpectedly shrank by 0.4pc in the third quarter, defying expectations that the UK had emerged from recession with 0.2pc growth. Shadow Chancellor George Osborne said the figures were �deeply disappointing�.
The Chancellor however insisted the figures were in line with his forecasts. �I�ve always been clear that growth will return at the turn of year,� he said.
The production and construction industries contracted broadly as expected in the third quarter, but a 0.2pc fall in output in the dominant services industry surprised economists.
A combination of rising house prices, rising equity markets, positive business surveys, and a slowing rate of unemployment growth, had widely supported the expectation that the UK recession ended in the third quarter.
The UK�s output is now down almost 6pc from its peak, �making this the worst recession in modern time� according to Andrew Smith, chief economist at KPMG.
It was the sixth successive quarter that gross domestic product (GDP) fell, a longer period than the recessions of the early 1980s and 1990s when GDP dropped for five consecutive quarters. It was the longest period of contraction since quarterly records began in 1955.
The figures were �desperately disappointing� according to John Philpott, chief economist at the Chartered Institute of Personnel and Development. �This recession looks more like a depression. For most UK workers the pain of recession goes on and the subsequent �jobs light-pay tight� recovery won�t feel much better.�
Economists said the data made it more likely that the Bank of England would extend the life support currently helping to prop up the economy, by expanding its �175bn quantitative easing programme in November.
Former Conservative Chancellor Lord Lamont said: �I am not surprised by this grim figure. We have a long stony road ahead. We are living on our sovereign credit card and it cannot go on indefinitely.
The problem ahead is that the economy is dependent on the stimulus and the stimulus cannot go on forever.�
Britain is lagging behind other major economies including Germany, France and Japan, which all returned to growth in the second quarter.
�These figures make sobering reading, both for the Government and for British businesses,� said Adam Marshall, director of policy at the British Chambers of Commerce. �Continued intervention - including help for businesses to access finance, and incentives to promote investment - is still needed. Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed.�
Sterling, which has risen sharply in the past few days, fell nearly 2 cents against the dollar to $1.6503 after the data were published.
The third quarter figures were the first estimate from the ONS and could be revised once it has gathered more data.
�Previous GDP figures have tended to be revised up more than down and the same may well apply here,� said Michael Saunders, economist at Citigroup.
The breakdown of the economy in the third quarter:
Mining and quarrying: -3.5pc
Manufacturing output: -0.2pc
Electricity gas and water supply: -0.6pc
Total production: -0.7pc
Distribution, hotels and restaurants: -1pc
Transport, storage and communication: -0.3pc
Services output: -0.2pc
Business services and finance: -0.1pc
Construction output: -1.1pc
Government and other services: 0pc
Agriculture, forestry and fishing output: -1.6pca
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