UK economy shrinks by more than expected

Friday, 24 July 2009 1:00 PM

By Liz Stephens

The UK economy contracted in the last three months by more than double the amount that economic experts had predicted.

Although an improvement on the previous quarter, the contraction of 0.8 per cent may indicate that recovery could be further away than previously thought.

The figures take the UK's annual rate of decline to 5.6 per cent, the largest fall since records began.

According to the Centre for Economic and Business Research (CEBR), the worse-than-expected figures mean the Treasury is unlikely to meet its own economic forecast.

The chancellor forecast a decline of between 3.35 per cent and 3.75 per cent in the Budget.

Richard Snook, senior economist at the CEBR said: "Weaker growth than the chancellor expects means that public sector net borrowing will exceed the £175 billion projected for the 2009/10 fiscal year".

The government is already facing a huge spending black hole so there are fears the new figures could have a knock on effect for public services.

Liberal Democrat treasury spokesman Vince Cable said: "These figures blow a hole in the chancellor's GDP forecast for this year.

"The government's failure to address the crisis in bank lending is only making the economic outlook worse.

"As a result, the deficit will balloon further, leading to bigger spending cuts or higher taxes.

"It's high time the government came clean as to where these will be."

The British Chambers of Commerce (BCC) called on the Bank of England to continue its actions to stimulate the economy.

David Kern, chief economist at the BCC said: "There is no room for complacency and suggestions of suspending quantitative easing are misguided. It is important to persevere with an aggressive policy stimulus to ensure that the economic downturn does not worsen".

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said that the data showed that hopes that a recovery was underway were premature.

"With credit still severely restricted, consumers and businesses continuing to retrench and world trade yet to pick up, it is hard to see any grounds for sustained optimism at the moment," she said.

The decline in economic output was largely caused by the business services and financial sector, which has been hit particularly hard by the financial crisis.

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• economy
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• economy and finance
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• recession