Recession looms largeThe credit crunch sees the UK economy shrink

25 October 2008

Graph with coins

Risk-free investment can be affected by interest, tax and inflation

The prospects for a UK recession loomed large today after official figures revealed the economy shrunk by 0.5% between July and September in the worst economic growth performance since 1990.

The estimated contraction in the UK's gross domestic product (GDP) was far worse than expected by economists and marks the first time the UK economy has fallen into negative territory in 16 years.

It is also the biggest GDP decline since the fourth quarter of 1990.

Recession will be confirmed with the next results

While the UK is not in a technical recession yet - defined as two consecutive quarters of negative growth - the figures from the Office for National Statistics (ONS) will fuel fears among experts that a recession is now inevitable.

The ONS's initial GDP estimate showed that the manufacturing sector, which accounts for around 14% of GDP, is now in recession.

Manufacturing output decreased by 1% in the three months to the end of September, coming after a 0.9% decline the previous quarter.

The powerhouse services sector, which represents three-quarters of the UK economy, also fell into negative territory, down 0.4% from growth of 0.2% in the second quarter - the biggest drop in 18 years.

Economists shocked by the extent of the drop

Vicky Redwood, of Capital Economics, described today's figures as "truly shocking" and said a 0.4% drop in service sector output came as a big surprise.

She said: "The fact that a recession is already under way isn't a surprise - even Mervyn King and Gordon Brown referred to it earlier this week.

"But the fact that output has shrunk so much so early on in the downturn is clearly worrying. We expect the economy to contract for around two years in all, with a peak to trough drop in output of 1.5% or even more."