British recession may last 'until end of year'

The economy could stay mired in recession until the end of the year, according to the latest official figures and forecasts from a leading economic think-tank.

Industrial production fell by 2.5 per cent in August, having barely stabilised in July, the Office for National Statistics said yesterday. The news shocked City economists, who had hoped the vast fiscal and monetary stimulus pumped into the economy would have yielded some increase in output by now.

The results leave British manufacturing output at its lowest level since 1992, and represent a severe setback to the prospects for recovery. Hopes of a swift end to recession were also dimmed by the latest estimates of growth from the National Institute of Economic and Social Research (NIESR). Its analysts said that, contrary to the consensus view, the UK economy did not in fact grow at all in the three months to September, meaning that the official end to the recession may have to be postponed until fourth-quarter figures are released in January.

"Our monthly estimates of GDP suggest that output was unchanged in the quarter to September as compared to the second calendar quarter of the year," the NIESR said. "Industrial production was much weaker than we expected in August. In part, this was because of reduced activity in the oil industry, which is known to be erratic. But the manufacturing sector showed further weakness as well."

If the economy does fail to improve, it will have further dire consequences for jobs, with unemployment already predicted to hit three million next year, and the public finances, which are showing the largest peacetime deficit in history. It implies that the Bank of England will leave interest rates low for even longer, and may even be tempted to increase it programmes of quantitative easing [QE] next month.

Even if the economy does register some growth in the third quarter, it looks increasingly likely that the positive number could be extremely small. Allan Monks, an economist at JP Morgan, said: "The drastically altered outlook industrial production is enough by itself to lower our GDP estimate in the quarter to between 0.1 and 0.2 per cent. While we stick with the view that policy will be left unchanged at this week's meeting of the Monetary Policy Committee, the chance of more QE in November has gone up significantly."

Yesterday, there was mounting speculation that the MPC might say it was extending QE by £25bn or even £50bn in November. Last month, the Bank of England's Governor, Mervyn King, warned: "For most businesses and households, the recession will continue for some while – in the sense that they will be experiencing levels of demand and output, including employment, well below the levels that we have got used to."

Other pieces of apparent good news about the economy yesterday – more cars registered because of the scrappage scheme, and the Halifax house prices index rising sharply – were largely discounted by City economists. Car registrations climbed by 11.4 per cent in September to 367,929, led by private buyers taking up the Treasury's £2,000 contribution towards a vehicle.

Howard Archer, a UK economist at Global Insight, said: "There is the danger that car sales will fall back markedly once the scrappage scheme ends, particularly because the upside for consumer spending is likely to be limited for some time to come by high and rising unemployment, low earnings growth and consumers' need to improve their balance sheets amid heightened debts." Meanwhile, Nick Hopkinson, the director of Property Portfolio Rescue, suggested that the 1.6 per cent rise in house prices in September had weak foundations.

"These monthly numbers simply reflect 'cherry-picked' lending to high earners with big deposits on prime property by the lenders concerned," he said. "House sales volumes are still at rock bottom and overall mortgage lending is falling, as any ordinary buyer will testify. Anyone wanting to sell their home should move fast before the harsh economic winter really sets in."

Although unemployment and a weak recovery is likely to adversely affect consumer confidence, the Nationwide's index, released today, shows it is past its all-time lows. The consumer confidence index rose by six points in September, increasing to 71 from 65 in August; it is now at its highest since April 2008.

Also out today is the KPMG/ Recruitment and Employment Confederation Report on Jobs for September which "signals further slight increases in both permanent and temporary staff employment".