Recession was deeper and recovery slower than expected
Britain suffered a deeper recession than previously thought and is recovering even more slowly than had been believed, official figures show.
By Philip Aldrick, Economics Editor
6:00PM BST 05 Oct 2011
The revelation came as the Office for National Statistics (ONS) unexpectedly downgraded its estimate of economic growth for the three months to June from 0.2pc to 0.1pc as part of a major recalculation of historical data. At the same time, it revised down its estimate for the three months to March from 0.5pc to 0.4pc.
Given the 0.5pc contraction in the final three months of 2010, the new figures revealed that the economy has flatlined for the past nine months. An examination of the detailed revisions showed that, technically, the economy is still marginally smaller than it was at the end of September last year.
Ed Balls, the shadow Chancellor, said: “These deeply concerning figures show the British economy has stagnated since the autumn of last year, well before the eurozone crisis… They show things are even worse than we thought.”
As part of the biggest revision to the classification and calculation of British GDP data in at least 15 years, the ONS said that it now believed Britain’s economy shrank by 7.1pc between March 2008 and its end in June 2009, making the recession deeper than the previous estimate of 6.4pc but three months shorter than thought.
The changes also revealed that the country has more catching up to do to regain its pre-recession level of output. The economy is currently 4.4pc smaller than its peak in March 2008. Before the latest revisions, the shortfall was estimated to be just 3.9pc.
The Great Recession is the UK’s deepest since the 7.7pc contraction in the Great Depression of the 1930s, but the period spent with the economy below its previous peak may yet prove to be longer. Simon Kirby, UK economist at the National Institute of Social & Economic Research, said: “Will it be the end of 2013 or early 2014 before pre-recession levels are recovered? It’s certainly possible.”
Economists said the data will pile more pressure on the Bank of England to restart quantitative easing (QE) on Thursday, as economists said it was hoping for an upward revision in the ONS’s estimates of recent growth.
Alan Clarke at Scotia Capital said: “What we believe is of more significance, not least for monetary policy, is where GDP growth has been over the last year and where it is going from here. The Bank had banked on some chunky upward revisions to the last year or so and what we have got is the opposite – slight downward revisions!
“This is a big blow to the Bank’s growth projection and points to significant downward adjustments at the November Inflation Report – confirming it is a case of when, not if, for QE2.”
Better-than-expected activity in the country’s powerhouse services sector in September, however, may convince policymakers to wait another month. The closely-watched purchasing managers index (PMI) for services rose to 52.9 last month from 51.1 – bouncing back from its biggest one-month fall in a decade and moving away from the 50 line that separates growth from contraction. The PMI figure was also much higher than expectations of 50.5.
Markit, which compiles the data with the Chartered Institute of Purchasing & Supply, said it now estimates that growth in the three months to September was 0.4pc – an increase on the previous quarter’s 0.1pc. “The rise in the index in September … may persuade the Bank to hold off before implementing any further stimulus at its October meeting,” said Markit economist Chris Williamson. “But the case it not clear-cut.”
Britain’s economic weakness in the three months to June can be attributed almost exclusively to over-stretched households. Household consumption collapsed by 0.8pc in the three months to June, its steepest fall since the second quarter of 2009, when the country was in the depths of the recession.
The depth of consumer spending weakness wiped 1.1 percentage points off growth, which was just offset by improvements in net trade and Government spending.