UK economy contracts by 1.5 per cent in Q4

Britain's economic health is fast deteriorating as its gross domestic product (GDP) contracted by 1.5 per cent in the fourth quarter of 2008, unrevised from the previous estimate, although down from a fall 0.7 per cent in the third quarter of 2008 thereby entering into deeper recession as per official figures released yesterday.

The Office for National Statistics said that the level of GDP in the fourth quarter of 2008 is now 1.9 per cent lower than the fourth quarter of 2007. For the year 2008 as a whole, GDP rose by 0.7 per cent over 2007, down from 3.0 per cent in the previous year.

Prime Minister Gordon Brown had said that with a weaker pound, exports will increase and boost the economy but output of the production industries fell 4.5 per cent compared with a fall of 1.7 per cent in the previous quarter, mainly due to declining manufacturing output.

Construction output fell 1.1 per cent over the quarter, unrevised from the previous estimate while the output in the service industries fell by 0.9 per cent in the fourth quarter, down from a fall of 0.5 per cent growth recorded in the previous quarter. There were falls in all the main service industries, in particular distribution and business services.

Wage freeze contributed to household expenditure falling as it declined by 0.7 per cent and is now 0.2 per cent lower than the fourth quarter of 2007 and government final consumption expenditure rose by 1.5 per cent and is now 4.4 per cent higher than the fourth quarter of 2007.

Gross fixed capital formation fell 2.3 per cent and is now 9.7 per cent lower than the fourth quarter of 2007.

The trade deficit in real terms decreased from £9.8 billion in the third quarter of 2008 to £8.8 billion in the fourth quarter of 2008. Exports of goods and services fell 5.5 per cent and imports were down 5.9 per cent.

The GDP expenditure deflator rose by 2.4 per cent compared with the fourth quarter of 2007, up from 2.1 per cent in the previous quarter.

Compensation of employees at current prices rose by 0.1 per cent and is now 2.6 per cent above the level seen in the fourth quarter of 2007.

Total gross operating surplus of corporations fell by 0.8 per cent and is now 0.6 per cent higher than the fourth quarter of 2007.

The Bank of England reduced its official bank rate for the third time in three months, with the latest cut coming in the first week of this month by 0.5 percentage points to 1.0 per cent, bringing the interest rate paid on commercial bank reserves to an historic low of 1.0 per cent, (See: Bank of England cuts Bank Rate by 50 bps to 1.0 per cent)  in a bid to lower the cost of lending and make easier access to credit.

Late last month, the International Monetary Fund painted a sorry picture for the recession-hit UK economy, forecasting that the British economy would perform the worst among all developed nations and contract 2.8 per cent this year (IMF paints gloomy picture for UK economy) </economy/worldeconomy/20090129_imf_paints.html>