Bad news for the Treasury: the Office for National Statistics says that the UK economy shrank 2.4% in the first quarter of 2009, equivalent to a year-on-year drop of nearly 5%. Not only is this much worse than previous ONS, City or Treasury forecasts, it’s also the worst contraction since 1958 – i.e. worse than any of the grim recessions of the 70s, 80s or 90s. Throw in some equally disappointing stats on household savings and business investment, and it’s hard to escape the conclusion that Alistair Darling’s recovery predictions look optimistic, to say the least...
The worse-than-expected GDP figure (the City had been expecting 2.1%, while the ONS had previously forecast 1.9%) was partly due to a big drop in construction sector output, after a change to the data collection methodology. But even if this turns out to be a one-off, output in the service sector, which accounts for about two-thirds of the economy, was also revised downwards: to -1.6%, from the previous estimate of -1.2%. The ONS has also changed its mind about when the recession began: it now thinks the economy started contracting slightly in the second quarter of last year. In other words, the recession has been both longer and deeper than expected. Not very electorate-friendly.
And that wasn’t the only bad news. The ONS also said that the household savings ratio had fallen again, from 4% to 3% - perhaps no surprise at a time when the Government has been desperately trying to get us to spend money. But this doesn’t bode well for our chances of paying down all that debt we’ve been piling up – at some point we’re going to have to start saving more cash. There was also a 7% drop in business investment, suggesting that companies are nervous about spending, plus a current account deficit of £8.5bn, suggesting that the Government isn’t. None of which is likely to help the economy’s recovery.
The ONS did add the caveat that: ‘Revisions to GDP are larger than usual, reflecting greater uncertainty in measurement during a period of rapid change in economic activity.’ So maybe these figures will also turn out to be way off, with the benefit of hindsight. Or at least, that’s what the Treasury will be hoping. Alistair Darling is currently forecasting a 3.5% drop for the year as a whole, but after these gruesome figures, many analysts think it will be more than 4%. He’s also predicting growth of about 1.25% next year – but although there are some signs that we may be through the worst (house prices rose slightly again last month, according to the eternal optimists at Nationwide), today’s data makes that sort of recovery sound like pie in the sky...
In today's bulletin:
UK economy suffers biggest slump in 50 years
Aston Martin bargain - £20k in 2010
Life no longer a beach for students
Nick Hood: A chill breeze of recession in the Windy City
'35 Under 35' in focus: The risk-takers