UK recession fear looms as economic growth hits zero

London, August 23:

Britain was braced last night for its first recession since the early 1990s after the government revealed that belt-tightening by households and business had brought growth to a standstill in the second quarter of this year.

Adding to the pressure on prime minister Gordon Brown to deliver a stimulus package to relaunch his administration, the Office for National Statistics (ONS) said the economy had performed less strongly than it had earlier estimated. It revised downgrowth from 0.2 per cent to zero in the three months to June.

Annual growth rate slowed to 1.4 per cent — its weakest since the period in late 1992 immediately after the pound left the Exchange Rate Mechanism on so-called Black Wednesday — with manufacturing and construction contracting and the service sector barely expanding. Household spending dropped by 0.1 per cent and investment by companies dipped by 5.3 per cent.

Britain has not seen a single quarter of falling growth since the recession of the early 1990s, but analysts said last night the economy was on course to fulfil one definition of recession — two quarters of declining GDP — in the second half of this year.

The domestic side of the economy, which excludes trade, has been on the slide since the start of the year as credit crunch and rising inflation have created a far tougher environment for consumer spending. House building has slumped as the property market has suffered, prompting calls from the House Builders’ Federation for lower interest rates from the Bank of England.

But with inflation expected to hit 5 per cent, the City of London — the British capital’s financial district — believes Bank of England will delay reducing cost of borrowing, putting added pressure on the government to boost the economy with a package of tax and spending measures this autumn.

Yesterday’s figures from ONS show the economy has cooled quickly since the start of the global financial crisis last summer. In the second quarter of 2007, quarterly growth of 0.9 per cent left the annual rate of expansion at 3.3 per cent. Subsequently, quarterly growth eased to 0.6 per cent in the third and fourth quarters of 2007, before halving to 0.35 per cent in the first three months of this year. Annual growth rate more than halved and is set to undershoot chancellor Alistair Darling’s budget forecast of 2 per cent expansion.

City analysts said the Treasury’s prediction of 2.5 per cent growth in 2009 looked even more optimistic. “The economy looks set to grow by just 1.2 per cent or so this year, with a strong chance of a technical recession in the second half,” said Jonathan Loynes, of Capital Economics. “Things will be worse in 2009.” Diana Choyleva, of Lombard Street Research, said: “There is nowhere for the UK consumer to go but to continue to retrench. Real income growth has slumped as inflation accelerated while nominal pay growth remained subdued.