Britain's economy shrank at its sharpest rate in 30 years in the first three months of 2009 and more dramatically than expected, casting serious doubt over government forecasts for a recovery by the end of the year. Official figures on Friday - the first sign from a major G7 economy of the nature of the downturn at the start of the year - showed British gross domestic product fell 1.9 percent on the quarter, the biggest fall since the third quarter of 1979.
-- Production weakest since 1974, services weakest since 1979
-- Figures cast shadow over UK government recovery forecast
-- UK retail sales rise unexpectedly in March
Most analysts had expected the 1.6 percent fall seen in the last quarter of 2008 to mark the sharpest drop in the recession, forecasting a 1.5 percent decline in the first quarter. "It's early days yet, but the drop opens up the possibility of GDP in 2009 as a whole falling by even more than the 4 percent we currently expect," said Vicky Redwood, an economist at Capital Economics.
The grim numbers suggest more policy action will be needed to stem the severity of the recession and could mean the government will need to borrow more than the record 175 billion pounds earmarked for 2009/10. In Wednesday's Budget, British finance minister Alistair Darling forecast a similar fall in the first quarter as seen at the end of last year, a 3.5 percent drop in output in 2009 and said he expected growth to return towards the end of the year.
But the International Monetary Fund thinks Britain's economy will shrink by 4.1 percent this year and by 0.4 percent in 2010. If the recession is worse than Darling predicts it will also strike a heavy blow to the ruling Labour Party's chances of staying in power after an election due by June 2010.
"We continue to be clear that we believe the economy will start to recover towards the end of this year and then build for a strong recovery after that," Treasury minister Yvette Cooper told BBC television in reaction to Friday's figures. Looking forward, economists are starting to believe the worst of the recession is over given the most recent evidence from business surveys. There are also some signs that banks are starting to lend more, a crucial factor in any recovery.
"Any recovery still looks some distance away," said Howard Archer, economist at IHS Global Insight. "(But) we expect the economy to contract at a slowing rate through the rest of 2009 and the first quarter of 2010 before stabilising." Still, the decline at the start of this year was as widespread as it was dramatic - only farming and government offered any support and falls elsewhere were record breaking.
Manufacturing output suffered its worst quarterly fall since records began in 1948. Overall production fell 5.5 percent on the quarter, the biggest drop since 1974. Output in the dominant services sector recorded its biggest quarterly fall since 1979. Business services and finance, which account for 30 percent of total GDP, recorded the biggest drop in output since that series began in 1983.
On the year, Q1 GDP fell by 4.1 percent, the biggest annual drop since the end of 1980 and also worse than expected. Some economists said the Bank of England may now need to extend its 75 billion pound quantitative easing programme and keep interest rates at their current record low of 0.5 percent for longer than expected to kick-start growth.
However, measures in Wednesday's government Budget fell well short of November's 20 billion pound fiscal stimulus and the government has little room for any further big measures given the dire state of the public finances. In a glimmer of good news, separate data showed an unexpected rise in retail sales on the month in March driven by strength in clothing and food sales but analysts cautioned against reading too much into what tends to be a volatile series.