UK economy set for worst year since 1931 as output collapses

Industry's pain intensifies with 12 per cent fall in output and no relief in sight

The industrial downturn is accelerating and the British economy is on course for its worst year since 1931, the latest official figures suggest.

The Office for National Statistics reported yesterday that manufacturing output fell by 6.4 per cent in the three months to January – an even faster rate of decline than the 4.9 per cent contraction seen in the quarter to December. The motor industry was one of the hardest-hit sectors – output falling by 10.6 per cent during the quarter. Overall, the annual rate of decline in output has reached an alarming 12 per cent.

Analysts were shocked by the figures, as they point to a GDP decline in the early part of this year that may prove even steeper than that seen during the last few months of 2008, when GDP shrank by 1.5 per cent. The research firm Capital Economics said that the trends could point to GDP contracting over 2009 by "4 per cent or so".

Such a result would rank as the country's worst year for economic growth since 1931 – which saw a fall in excess of 5 per cent, the collapse of a Labour government and ushered in a miserable decade of mass unemployment and hunger. A 4 per cent slide would easily beat the post-war record of a 2.1 per cent slump, set in 1980.

David Kern, the chief economist at the British Chambers of Commerce (BCC), said of manufacturing: "The sector has so far failed to benefit from the sharp falls in sterling. The critical priority is to ensure that the vital skills base is not lost during this recession. Urgent measures are needed to help viable and well-managed firms hold on to their trained and skilled employees."

The National Institute for Economic and Social Research, which enjoys an enviable record for accurate forecasting, warned that the economy's decline is gathering pace.

In its estimate, output fell by 1.8 per cent in the three months ending in February, after a fall of 1.7 per cent in the three months ending in January. The NIESR says that the level of economic activity has now fallen back to the August 2006 levels and is 4.3 per cent below its peak of April 2008.

More job losses were announced yesterday. The design and engineering consultancy Scott Wilson confirmed up to 350 UK jobs cuts and announced a salary freeze for the remaining UK staff. Meanwhile, hundreds of jobs were in jeopardy at Wrekin, a Midlands construction group which employs 600. It has gone into administration.

Only a few months ago there was widespread belief that the worst of the downturn could be limited to the financial sector, and that manufacturing in particular would benefit from the slide in the value of sterling – down about a quarter on the summer of 2007.

Yet the ONS data shows that industry is failing to respond to that and the various stimuli applied by the authorities in recent months – interest rate cuts, tax reductions, public spending increases and the recapitalisation of the banks.

Output slumped by 2.9 per cent between December and January alone. Almost every sector contracted – only the production of petrol was significantly ahead, with food and drink a little up. The steel industry was down 11.4 per cent and the timber trade down 10.4 per cent.

Amit Kara, an economist at UBS, concluded: "We expect manufacturing to struggle in spite of the more competitive exchange rate. Indeed, we know that demand prospects are significantly more important for export demand that the exchange rate – five times more, on our estimate. That pessimism is echoed in the major business surveys including the Chartered Institute of Purchasing and Supply, the CBI and the BCC, which point to a deceleration in domestic as well as export demand."

In next month's Budget, the Chancellor is expected to downgrade his forecast for 2009's growth of 1 per cent, set in last November's pre-Budget report – and generally viewed as ludicrous in current conditions. A much more severe contraction would place even more stress on the UK's public finances. Yesterday, the accountants PricewaterhouseCoopers revealed a "fiscal gap" of about £43bn in the Treasury's plans. PwC added: "It is likely to require a combination of severe public spending restraint in the next Comprehensive Spending Review alongside significant tax increases in 2011 beyond those in the pre-Budget report."