UK output shrinks by 1.6%

There was yet more economic gloom today after official figures showed UK output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008.

The figure - revised lower from the original 1.5 per cent estimate by the Office for National Statistics (ONS) - represents the worst fall in output since April-June 1980.

The slump was driven by a bigger-than-estimated fall in construction as well as declining output from the UK's services sector.

The pressure on struggling households was laid bare by a 1 per cent fall in spending over the quarter. This represents the biggest drop since 1980 as households fearful of rising unemployment batten down the hatches.

The new caution was also underlined by a huge jump in the proportion of savings being put aside. This soared to 4.8 per cent during the final three months of 2008 - almost treble the amount in the previous quarter.

Although GDP growth over the whole of 2008 was left unchanged at 0.7 per cent, the newly-revised fourth-quarter figures left GDP 2 per cent down year on year and sparked predictions of a 4 per cent decline over the course of 2009.

Capital Economics' Jonathan Loynes said: "The rise in the saving ratio from 1.7 per cent to 4.8 per cent suggests that the required adjustment in households' balance sheets is at least under way.

"But these processes have much further to go and the early signals point to a fall in GDP of a similar magnitude in the first quarter of 2009, putting the economy on track to contract by as much as 4 per cent this year."

The ONS figures revealed a far steeper decline in commercial construction, housebuilding and infrastructure work at the end of last year than first thought.

The 4.9 per cent fall in output was the worst since 1980 and sharply lower than the ONS's 1.1 per cent initial estimate.

The services sector - which accounts for almost three-quarters of the economy - saw its fastest contraction since 1979, although the 0.8 per cent decline was revised up from the initial 0.9 per cent estimate.

IHS Global Insight economist Howard Archer warned: "Consumer spending will be increasingly pressurised by soaring unemployment and markedly reduced income growth, while business investment is being slashed in the face of sharply weakened demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions."