Recession Lingers As Economy Contracts

(Reuters) – THE ECONOMY CONTRACTED IN THE THIRD QUARTER of this year, quashing hopes the downturn was ending and instead marking the longest recession on record.

The pound plunged more than a cent against the dollar and government bonds surged as traders and analysts bet the Bank of England was more likely to expand its quantitative easing program of buying up debt market assets to secure a recovery.

Friday’s figures are also a blow to Prime Minister Gordon Brown’s Labour government, trailing in opinion polls and hoping for recovery to take hold well before an election due by next June.

The Office for National Statistics said the gross domestic product fell by 0.4% between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.

This was much worse than analysts’ expectations of a 0.2% rise. Not a single analyst out of the 35 polled by Reuters before the data had predicted a negative reading.

‘Third quarter GDP is awful, with no positive news within the report,’ said James Knightley, economist at ING.

‘More worryingly from sterling’s perspective is the fact that the UK may be the only major economy to have contracted in the third quarter.’

Japan, Germany and France all pulled out of recession in the second quarter and economists expect the United States to have returned to growth in the third.

The data will pose a major challenge for the Bank when it reviews its growth and inflation forecasts in early November and analysts remain divided over whether the bank will expand its £175 billion quantitative easing scheme.

August’s forecasts showed the Bank would meet its inflation target over the medium term; but this was based on an annual economic decline of only 4.6% in Q3. Friday’s figures show a 5.2% fall, only marginally better than the record 5.5% annual fall registered in the second quarter.

‘It’s fair to say that these figures might be an argument that the Bank of England will be using to expand QE… It clearly tilts the balance in favour of those who wish to expand the program,’ said Commerzbank economist Peter Dixon.

Chancellor Alistair Darling said he still expected growth to return by the turn of the year, reiterating a forecast made in the budget in April. Darling will update that forecast in the pre-Budget report due in the next few weeks.

‘We’re facing the worst global financial crisis and recession in 60 years,’ he said. ‘That’s all the more reason to continue the action the government is taking. To remove it now would be madness.’

But Darling’s Conservative counterpart, George Osborne, said Germany and France’s better economic performance showed government policy had failed.

‘We now know that Gordon Brown’s recession plan has not worked, and this news has destroyed Labour’s claim that Britain was better placed than other countries to weather the storms.’

The ONS said there had been a peak-to-trough GDP fall of 5.9% during the current recession, compared to 6.0% between the second quarter of 1979 and the first quarter of 1981 — a period when there were some quarters of growth.

The quarterly decline between April and June was unrevised at 0.6%.

Analysts had been pinning their hopes for recovery on months of survey evidence that had pointed to a sharp rise in confidence and activity in the services sector, which makes up three quarters of Britain’s economy.

But services contracted by 0.2% over the quarter, with the distribution, hotels and catering sub-sector leading the decline with a 1.0% quarterly drop.

Economists had already expected industrial output to be weak, following a sharp monthly drop in August, and the GDP data bore this out. Industrial production fell by 0.7% over the quarter, taking its annual decline to 10.4%.