Britain lurches towards recession

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Fears that Britain may soon slide into recession were fuelled yesterday by news that the economy grew by just 0.2 per cent in the second quarter, down from the already poor 0.3 per cent recorded in the first three months of the year and the weakest rate of growth in three years.

Industry, comprising manufacturing and oil and mining activities (and about a fifth of the total economy) is already in recession, having contracted for two successive quarters. The financial services sector, accounting for about 28 per cent of the national income, grew hardly at all – 0.1 per cent – having been a significant driver of growth during the boom.

A fall in transactions across financial markets was, in turn, responsible for much of this depressed reading. However, the largest single contributor to the decline in overall output was in the construction sector, with a near collapse in private housebuilding. Overall, building industry activity fell by 0.7 per cent during the quarter.

The slowdown in the annual rate of growth, from 2.3 per cent to 1.6 per cent, is the steepest decline since the mid-1990s. With little hope for a bounceback in the economy before the second half of next year at the earliest, the figures strongly suggest that it will be impossible for the Government to meet even the lower end of its forecast rate of growth this year, announced as recently as the March Budget, of a 1.75 to 2.25 per cent range. That will have serious implications for the public finances and the prospects of the Government meeting its fiscal rules.

Analysts at Grant Thornton explained: "Broadly speaking, and based on our economic model, the only arithmetically realistic way in which GDP growth in 2008 could reach the lower end of the Treasury's Budget forecast, of 1.75 per cent, is for GDP growth in the third quarter and fourth quarter of 2008 to be [say] 0.4 and 0.5 per cent respectively. This would give GDP growth in 2008 as a whole at 1.75 per cent.

"Whilst such an outcome is not impossible, given the various headwinds facing the UK economy it has to be considered very unlikely. This, combined with the prospects for 2009, mean that the pre-Budget report this autumn would almost certainly show the Treasury's fiscal rule, the Sustainable Investment Rule, limiting total government net debt to 40 per cent of GDP, being breached."

Peter Newland, an economist at Lehman Brothers, said: "Survey evidence points to softer service-sector activity heading into the third quarter, as well as further declines in industrial output and construction. We continue to expect negative GDP growth over the next three quarters – ie, a greater than 50 per cent probability of recession (two quarters of negative growth) this year."

Howard Archer, of Global Insight, added: "We expect the economy to stagnate at best through the second half of 2008 and the early months of 2009 ... Mild recession is now looking highly possible."

Last week, the deputy governor of the Bank of England, Charlie Bean, warned that "there is a risk that the credit crunch leads to a deeper and more prolonged slowdown" than the Bank had previously predicted.