Britain's economy has worst slump for 90 years

Third-quarter GDP is revised slightly upwards, but the UK is still in recession

Britain's economy performed marginally better than expected in the third quarter, according to official statistics published yesterday, but the revised figures still confounded hopes of a return to growth.

The report, produced by the Office for National Statistics, shows gross domestic product contracted by 0.2 per cent in the three months to September, a minor upward revision from previous estimates of 0.3 per cent. But GDP was still 5.1 per cent lower than in the same quarter of 2008 – and six per cent below its early 2008 peak – leaving the UK on course for a 4.5 per cent contraction over 2009 as a whole, the worst slide since 1921.

Other revisions put the depths of the worst of the recession even lower than originally thought – with growth figures for 2008 taken down from 0.6 per cent to 0.5 per cent.

In the third quarter of 2009, output in manufacturing and the services sector was weaker than originally thought, while a surprisingly strong performance in the construction sector – up by 1.9 per cent rather than down by 1 per cent – helped push up the headline GDP figure. But even with the improvements, the UK is still lagging behind its international rivals (see graph).

Economists were disappointed that yesterday's revisions did not go further. Commentators were shocked when the first round of Q3 GDP numbers, published in October, showed a contraction of 0.4 per cent rather than the anticipated return to growth. Then last week's positive business investment statistics – down by just 0.6 per cent, rather than the forecast three per cent – renewed hopes that the overall GDP contraction could go up to just a 0.1 per cent fall.

On a more positive note, balance of trade numbers published separately yesterday show a narrowing deficit. Although Britain's imports were still worth £4.7bn more than its exports in the three months to September, the gap represents only about 1.3 per cent of GDP, compared with deficits of nearer four per cent during the boom years. The balance is being helped by depressed consumer demand and the weak pound.

But some economists maintain the deficit would have been smaller without the car scrappage scheme the Government introduced to boost the ailing auto sector. By failing to specify that replacement cars must be made in the UK, the majority of the scrappage subsidy went abroad. South Korean manufacturers did particularly well, with Hyundai's sales up by 203 per cent by August, SsangYong's by 167 per cent and Kia's by 65 per cent.

Less encouraging for the UK's economic health is that businesses of all kinds are still preferring to run down their stocks than buy more. Inventories dropped by £4.6bn in the last quarter, even faster than the £3.7bn fall in the three months to June. Howard Archer, at IHS Global Insight, said: "Significantly, the economy would actually have achieved growth of 0.1 per cent in the third quarter, but for an increased running down of inventories."

Of more ambivalent implication is the saving ratio. Households saved a whopping 8.6 per cent of their income in the third quarter, compared with 7.6 per cent in the previous three months, and just 0.9 per cent in the same period of 2008. The spike is a mixed blessing, according to Jonathan Loynes, at Capital Economics. "There is a contradiction in what policy-makers are trying to achieve," he said. "In the short term they want people to keep spending and lift us out of recession, but over the longer term they need to rebalance the economy away from excessive dependence on household borrowing and consumption."