Recession figures heighten the gloom

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The Independent Online

Britain's fall into recession became official today after dire figures showed the biggest decline in economic output since 1980.

The UK economy contracted by 1.5 per cent in the final three months of 2008 - worse than expected by analysts and sparking fears of a deep and prolonged recession.

Output has not fallen so badly for more than 28 years, with the economy last suffering a bigger plunge in the second quarter of 1980 when the UK was battling soaring unemployment and inflation at the start of the Thatcher era.

The fourth quarter 2008 plunge comes after a 0.6 per cent fall in gross domestic product (GDP) in the previous three months - a "technical" recession, as defined by two successive quarters of negative output.

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

Mr Brown said the Government was fighting the recession with "every weapon at our disposal".

He added: "We have had 10 years of growth in this country that no other Government has had in any period of previous history.

"We're dealing actually with a global financial crisis with a determination and confidence about how we can get through it."

Britain is the first major economy to publish GDP figures for the fourth quarter of 2008, but countries worldwide are set to be follow with equally gloomy data.

Today's estimated output figures from the Office for National Statistics (ONS) also showed that UK gross domestic product (GDP) growth for 2008 as a whole fell to 0.7 per cent, the poorest full-year output since 1992.

London's leading share index fell back below the 4000 barrier after the grim output figures, recovering to 4033.6 late this afternoon, while the pound slumped to its lowest level against the dollar since 1985.

Business body the CBI warned the recession was set to be worse than that of the early 1990s.

John Cridland, CBI deputy director-general, 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 of this will be much higher unemployment."

The fall in GDP is worse than the 1.2 per cent decline most economists were expecting.

The last time GDP suffered a bigger fall quarter-on-quarter was between April and June 1980, when the economy contracted by 1.8 per cent.

Economists raised concerns that the sharper-than-forecast fourth quarter signalled a dire year for the economy, with no sign of an early recovery.

Charles Davis at 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."

The UK recession has been all but inevitable in recent months as the financial crisis escalated in the wake of the credit crunch.

A crippling lending drought has hit the housing and construction markets hard, with all sectors across the economy now suffering.

The ONS said the manufacturing industry saw output decrease by 4.6 per cent quarter-on-quarter in the last three months of last year.

The powerhouse services sector, which accounts for about 75 per cent of the economy, fell by 1 per cent in its worst performance since the third quarter of 1979.

Total production, which includes manufacturing and accounts for 18 per cent of the economy, plunged by 3.9 per cent in the last three months of last year in the lowest reading since the second quarter of 1980.

And ONS retail figures also out today showed that the value of sales last month fell by the most since records began in 1986.

There are fears that the recession will be deep and prolonged, with Bank of England Governor Mervyn King warning earlier this week that the recession was tightening its grip.

He said the economy was expected to continue contracting into the first half of the year with "further marked falls in output".

Experts now fear that the economy could shrink by 3 per cent this year in what could be the biggest decline since the Second World War.

Unemployment is already rising at an alarming rate, with data this week showing that the number of jobless rocketed to 1.92 million in the three months to November.

Today's GDP data is likely to intensify pressure on the Bank of England to cut interest rates again next month, having already trimmed rates to a historic 315-year low of 1.5 per cent.

But as the cost of borrowing comes close to zero, the Bank warned it may need to look at using "unconventional" measures.

Howard Archer, economist at IHS Global Insight, said he expected rates to be cut by a half point to 1 per cent in February.

"However, it is far from inconceivable that interest rates could come all the way down to zero," he added.