UK 'set for worst downturn since Second World War'

Sharp fall in industrial output in November adds to the economic gloom

The British economy has already lurched deep into recession, according to figures from the respected and independent National Institute of Economic and Social Research (NIESR), and is heading for the worst downturn seen in any advanced economy since the Second World War.

The NIESR has an enviable record for economic forecasting, and said yesterday that it estimated that the UK economy shrank by 1.5 per cent in the three months ending in December – far worse than previously thought. The consequences for unemployment, the housing market and the public finances could be catastrophic.

The NIESR said that "while the recession began in May, the rate of recession increased sharply in the autumn of last year. Since 1955, when quarterly figures were first produced, there have been only five quarters in which output has fallen more sharply". The NIESR data is also a poor omen for this year, as output is expected to slow even further over the next six months, at least. Many economists are predicting a slump of historic proportions.

Michael Saunders, head of European economics at Citi, said GDP will fall by 2.5 per cent over 2009, an "unusually severe" recession. "This would be a little worse than the severe 1980 recession (down 2.1 per cent) and would also be the worst of the past 60 years," he added. "Among G7 countries, only Italy (1975) and Canada (1982) have suffered such a severe annual decline in GDP since 1950. In economic terms, the UK in 2009 will be in rare, but not esteemed, company."

The UK economy contracted by 0.6 per cent in the third quarter and stood still in the second quarter of 2008. If the official figure, due on 23 January, does indeed confirm the NIESR forecast for the fourth quarter, then the UK will qualify as being in recession on the conventional definition of two successive quarters of negative growth. The NIESR says that the UK economy grew by just 0.7 per cent in 2008, by far the worst performance since Labour came to power in 1997.

Exceptionally poor industrial output figures for November issued by the Office for National Statistics added to the gloom. Overall production was down 2.3 per cent during last month alone, with manufacturing activity some 2.9 per cent lower. The British car industry seems to be doing especially badly, with a 21.8 per cent ann-ualised fall in output in November. Producer price inflation or "factory gate prices" fell to nil in December, reinforcing the impression of rapidly cooling economy.

The figures and some grim news on jobs from the US pushed the stock market lower and prompted calls for more help from the authorities.

Steve Hughes, policy adviser at the British Chambers of Commerce, said:"Manufacturing industry is being battered by the downturn and these figures are a snapshot of how severe the recession could be. When even the weaker pound is failing to help exporters, policymakers should be alert to the size and importance of the task that faces them." The latest data points to a rise in unemploy-ment towards the 3 million mark this year; the Prime Minister is to host a "Jobs Summit" at Downing Street on Monday.

The Bank of England cut the bank rate by 0.5 percentage points on Thursday, but reductions in the official cost of borrowing are having only a muted effect on the rates available to households and firms. The Business Secretary, Lord Mandelson, is said to be readying a package of help for businesses to be revealed over the next few weeks, possibly including a new nat-ional loans guarantee scheme.