Longest recession on record grips UK

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The Independent Online

The UK is now in the grip of the longest recession since records began, according to gloomy official figures published today.

Hopes for an end to recession were scuppered as the economy shrank by a shock 0.4 per cent between July and September - a record sixth quarter in a row of decline.

Output has now slumped 5.9 per cent since the onset of recession - almost as bad as the 6 per cent slump seen in the early 1980s - the Office for National Statistics said.

The lingering decline comes despite interest rates at a record low of 0.5 per cent since March, additional Government spending and an unprecedented £175 billion boost to the money supply through quantitative easing.

And it shows the UK lagging behind other major economies such as France and Germany, which both emerged from recession in the second quarter of the year.

Chancellor Alistair Darling said he was still confident of a return to growth "at the turn of the year" but the Government's stewardship of the economy came under heavy fire from political opponents.

"This news has destroyed Labour's claim that Britain was better placed than other countries to weather the storms," shadow chancellor George Osborne said.

Liberal Democrat treasury spokesman Vince Cable said the economy still faced "massive structural problems". He added: "It is critical ministers spell out a credible path as to how they will deal with the deficit."

Experts had been ready to toast a technical end to the recession during the period, with forecasts of a modest 0.2 per cent advance ending five quarters of decline.

But the pound sagged against the dollar and euro on the hugely disappointing figure as markets bet on more support for the economy from the Bank of England with an extension of the QE programme to as much as £250 billion.

Economists warned of a potential deflation risk and said it could take at least six years to make up the output gap left by the recession.

"Even accounting for a dent to potential output from the recession, the output gap is probably already over 3 per cent of GDP and is unlikely to be closed until 2015 or so," Vicky Redwood of Capital Economics said.

John Cridland, deputy director-general of the CBI business group, said the figures were "disappointing and concerning". He added: "Recovery, when it comes, will be fragile and volatile."

The worse than expected figure could signal a downgrade to official growth forecasts in November's Pre-Budget Report - which would mean public borrowing rises beyond the current record £175 billion estimated.

And the pressure on the economy will intensify in 2010 as stimulus measures such as the temporary VAT cut and the "cash-for-bangers" scrappage scheme come to an end. Unemployment is also steadily rising towards three million.

Overall service output, which represents almost three-quarters of the UK economy, was expected to register growth but instead disappointed with a 0.2 per cent decline over the quarter.

The construction sector also remained in the doldrums - falling 1.1 per cent during the period - and is down by a mammoth 14.7 per cent since the beginning of 2008. Industrial production output shrank by 0.7 per cent and has declined 13.7 per cent overall since the recession began.

IHS Global Insight economist Howard Archer also underlined the stiff challenges faced by the UK on the road to recovery.

He said: "High and rising unemployment, the need for consumers and businesses to improve their balance sheets, and ongoing tight credit conditions amid still-serious financial-sector problems, are particularly worrying for growth prospects.

"On top of this, economic activity will be held back...by the need for extended, major fiscal tightening to rein in the terrible public finances."