Bill Jamieson: Shock fall in GDP confounds the experts

Published on Friday 23 October 2009 11:22

DOWN went recovery hopes, down went the pound and up went the stock market on a major upset this morning that the UK economy is still in recession.

Keenly awaited figures on the economy shocked the pundits with a 0.4 per cent fall in Gross Domestic Product in the June-September period. Analysts had been expecting a rise of 0.2 per cent. Not a single analyst out of the 35 polled by Reuters before the data had expected a negative reading

The news means that the UK economy has now contracted for six consecutive quarters, the first time this has happened since quarterly figures were first recorded in 1955, making this the longest downturn on record.

The unexpected decline in the services sector was the key factor behind the drop, with the distribution, catering and hotels sector performing particularly badly.

The pound fell by more than a cent against the dollar and gilt futures surged. But the stock market rose - because it now looks as if interest rates will stay lower for longer and that the Bank of England's programme of 'Quantitative Easing' is unlikely to end any time soon.

The prospect of an even longer period of monetary stimulus and low interest rates helped the FTSE 100 to a rise of more than 50 points or 1 per cent to 5259.3. Banks were in the van of the advance together with mining stocks.

The economy shrank 5.2% compared with the same period last year, only marginally better than the record figure of 5.5% in the previous three months. Today's figures are only a preliminary snapshot, and almost certainly subject to revision in the coming weeks so judgement should be tempered accordingly. But there is no doubt these figures will be a big disappointment to business, households and the government.

Said James Knightley economist at ING, "Third quarter GDP is awful, with no positive news within the report. More worryingly from sterling's perspective is the fact that the UK may be the only major economy to have contracted in the third quarter."

With an election due by next June, the length of the downturn will be an embarrassment to Prime Minister Gordon Brown, particularly as Germany and France are already out of recession.

The 175bn already announced for the quantitative easing programme will have been spent by next month, so the strength of the third quarter GDP number will be important in deciding whether to extend it.

• Bill Jamieson is The Scotsman's Executive Editor. Click here to visit his column archive.