Britain's GDP shrank 1.6 per cent to a 28-year low in Q4 2008

Britain's National Statistics confirmed on Friday that the economy shrank 1.6 per cent in the last three months of 2008, surprising analysts who had expected a small downward revision.
 
Gross domestic product (GDP) sank by 2 per cent in the fourth quarter of 2007.

The official second estimate of GDP confirmed that Britain entered a steep recession, which economists said may continue for some time.

That left growth for 2008 as a whole at just 0.7 per cent - the slowest rate for 17 years, and a marked deceleration from the three per cent expansion in 2007.

Economists were expecting GDP to have contracted by 1.5 per cent in the final quarter of last year.

It is the biggest quarterly fall in GDP since 1980 and the biggest annual fall in GDP since the last recession in 1991. The contraction was aggravated by plunging construction output, falling consumer spending and businesses cutting back their inventories.

It reinforces International Monetary Fund's concern the that Britain could be the worst affected by global recession.

However, some bigger economies had fallen more than this. In the three months to December, Japan suffered a 3.3 per cent drop in GDP - the biggest since 1974 - and Germany's economy shrank by a record 2.1 per cent. The United States contracted at its fastest pace in nearly 27 years in the fourth quarter.

Households cut spending at the swiftest rate since 1991, manufacturers saw their worst quarter since 1974 - when Britain was forced in to a three-day week due to energy shortages - and the dominant services sector hasn't done as badly since 1979.

Third quarter out put was revised down to show a 0.7 per cent drop on the quarter, from a 0.6 per cent fall reported before.

 The Bank of England and the government are hoping for a turnaround towards the end of this year following cuts of four percentage points in base rate to a record low of one per cent and a 20 billion pound fiscal stimulus package.

Construction output tumbled 4.9 per cent over the quarter, revised down from a fall of 1.1 per cent. The decline is the biggest quarterly fall in construction output since the fourth quarter on 1980.

Cuts in interest rates and a general reluctance to spend as the recession deepens saw household saving ratio jump to 4.8 per cent between October and December, the highest since the start of 2006, from 1.7 per cent in the previous quarter.

There was also evidence that firms ran down inventories even more aggressively that previously thought - by more than £4 billion after a build-up of £1 billion in the third quarter.

The Office of National Statistics also revealed that Britain's current account deficit – the difference between goods exported and goods imported – narrowed to £7.64 billion in the fourth quarter of last year from £8.16 billion in the previous quarter.

Goods and services exports declined 3.9 per cent in Q4. However, the contraction in imports was more pronounced, at 5.9 per cent, over the same period.

Meanwhile, government spending rose 1.3 per cent quarter-over-quarter.

The GDP figures come hot on the heels of data the previous day showing UK retail sales plunged by 1.9 per cent during February.

The UK consumer prices in February climbed 3.2 per cent from a year earlier, data revealed on Wednesday. The UK central bank last month forecast that inflation will slow to 0.3 per cent in 2011, below the 2 per cent target.