Recession: Hopes of summer recovery lie in tatters

ALISTAIR Darling's prediction that the UK economy would start to pick up in July looked hopelessly optimistic yesterday, when official figures revealed the country was in recession.

The Chancellor was forced to admit that the 1.5 per cent fall in Britain's economic output in the last three months of 2008 exceeded his fears and was "undoubtedly sharper" than many people predicted.

The confirmation that the UK was now in recession – after a 0.6 per cent fall in gross domestic product (GDP) in the third quarter of the year – prompted financial experts to warn that the country may be heading for a two-year recession.

The news came as hundreds more jobs were threatened or axed across the UK, with workers at Stirling Council and a salmon-smoking factory in Inverness in the firing line. Unemployment was revealed to have risen to 1.92 million earlier in the week.

Gordon Brown, the Prime Minister, pressed on how long the recession would last, effectively admitted the economy was entering uncharted territory when he said: "It depends on the degree of international co-operation."

Ministers are hoping that a recovery plan due to be announced by Barack Obama, the new US president, will have a global effect and boost domestic initiatives, such as the underwriting of "toxic" debts held by UK banks, in an effort to encourage them to lend to businesses and prospective homebuyers.

The GDP figures, published by the Office for National Statistics, confirmed the UK was in recession for the first time since 1992. The 1.5 per cent fall on the previous quarter – the biggest since 1980 – masked a drop of 4.6 points in UK manufacturing, which the Chancellor blamed on declining exports.

The pound plunged yesterday to its lowest level against the US dollar since 1985.

Economic experts at the Centre for Economic and Business Research (CEBR) said that yesterday's figures were the "final nail in the coffin" for Mr Brown's claim to have ended boom and bust.

Charles Davis, of the CEBR, said: "It is not just the fact that the UK has officially entered recession that will cause concern; it is the size of the contraction.

"This supports our view that the economy is set for the steepest contraction in the post-war era in 2009."

John Cridland, the deputy director-general of the CBI, said: "The intensity and speed of falling demand, combined with the global credit crunch, mean this recession is going to be more painful than the early 1990s and, sadly, one consequence will be much higher unemployment."

Mr Brown said the government was fighting the recession with "every weapon at our disposal". He added: "We're dealing actually with a global financial crisis with a determination and confidence about how we can get through it."

The gloom was deepened with the revelation that up to 170 posts at Stirling Council, many in management, are at risk as part of a "root-and-branch" review of services instigated by the SNP administration.

A council spokeswoman said it would seek to protect front-line services and many of the posts were vacant or filled by agency staff.

Other jobs lost or threatened yesterday include 260 at consultants Atkins, which has an office in Edinburgh, and 680 at the parcel carrier Home Delivery Network, which will close seven depots in England.

More than 300 jobs are at risk at the salmon smoking factory of Strathaird Salmon in Inverness, which will close in August. All 326 staff will be made redundant, or forced to relocate to Fraserburgh, almost 100 miles away.

The Seafood Company, which owns the site, said it was optimistic that all employees could be absorbed elsewhere.

A review found that annual running costs had increased by £900,000 year on year, and that a further £7 million of investment was required over the next five years.

Iain Herd, managing director of Strathaird Salmon, said: "The need to make any redundancies is regrettable. However, we believe that, through consolidation, we can secure the long-term growth and profitability of the business and safeguard the future for our employees in Scotland."

Elsewhere, the Sofa Workshop, which employs 170 people at 30 UK stores, has gone into administration after orders plunged. The firm, which specialised in bespoke, hand-made sofas, had been struggling to fill its order books in the housing market downturn.

More gloomy news came from the building products supplier Heywood Williams, which said 100 posts had been lost in the UK, and Gloucester motor parts supplier Takao, which said 100 jobs could go following last week's announcement by Honda of production cuts.

Takao supplies Honda's Swindon plant, which is to freeze production for four months.


Bill Jamieson: It's bad, and bad enough – but could it be even worse than they say it is?

IT'S the worst week, in the worst month, in the worst year for Britain's economy. And there is no sign of a halt to the slide.

The 1.5 per cent fall in gross domestic product compared with the final three months of 2007 is the country's worst performance since the second quarter of 1980. Taken with the 0.6 per cent fall in the preceding three months, the 2.1 per cent drop in GDP is almost as bad as the total drop during the whole of the 1990s recession of 2.5 per cent.

And the latest figures may have underestimated the fall in business services and finance, which represent some 30 per cent of the economy. Output here is said to have fallen by 0.5 per cent in the fourth quarter against a decrease of 0.6 per cent in the third. The notion that there was a "recovery" in this sector, even one so fractional, is questionable.

More bizarre still is that, in comparison with the fourth quarter of 2007, output in business services and finance was 0.1 per cent higher. Many will question how, after the banking sector collapse, freeze in lending and opening rounds of redundancies, output from this sector could be said to have risen compared with a year ago.

Construction sector figures show a modest decline of 1.1 per cent against a fall of 4.6 per cent in manufacturing. Output survey results are not yet available and this early estimate is based on an "activity balance model". A downward revision here looks likely.

Last month, the pessimistic talk was that the UK economy would contract by 1.5 per cent in 2009. Now, with no let-up in the torrent of bad news, the estimates range up to 3.5 per cent. It may be even hit 5 per cent, says Citigroup economist Michael Saunders, close to the worst year of the 1930s slump (5.5 per cent).

However, though this week has brought a sharp rise in unemployment, a dramatic plunge in bank shares, a surge in government debt, and bleak business confidence reports from the Bank of England's survey team, some analysts still believe we will see the beginning of a recovery by the end of the year.

Philip Shaw, of Investec, said: "We do not expect a decline of this magnitude next quarter, or indeed over the remainder of this economic cycle. Our 2009 forecast is for -2.1 per cent."