Chancellor's recovery hopes dashed as UK economy continues to shrink

Published on Friday 24 July 2009 22:10

ALISTAIR Darling's hopes that the recession could be over by Christmas were dealt a blow yesterday with figures showing the UK economy was not bouncing back as sharply as he predicted.

Britain's economic output has shrunk by 0.8 per cent between April and June – more than double the 0.3 point decline expected – according to the Office for National Statistics.

Though this was an improvement on the first three months of the year, when GDP fell by 2.4 per cent, it put the annual rate of decline at 5.6 per cent – the worst performance since records began in 1955.

This is more than double the depth of the early 1990s recession and approaching the level of the slump seen in the early 1980s.

IHS Global Insight economist Howard Archer called the figures "a really nasty and disappointing shock", while opposition politicians blamed them on continued problems with the lack of bank lending.

SNP Treasury spokesman Stewart Hosie MP said: "As the economy slid into recession, with every on-the-hoof policy, came the assertion the downturn would be short and shallow. It is now clear to everyone, even the Chancellor, that this is not the case."

Tory shadow chancellor George Osborne warned that more job losses were now inevitable. The jobless total is expected to break three million next year.

Mr Osborne said: "These disappointing figures are much worse than expected and show that the recession is longer and deeper than the government had lead us to believe.

"The sad news is this will mean the rise in unemployment is likely to be even steeper. It is time we had a bit more realism from our Prime Minister about the state he has lead the economy into and the debt crisis it now faces."

Vince Cable, the Liberal Democrat treasury spokesman, said: "These figures blow a hole in the Chancellor's GDP forecast for this year.

"The government's failure to address the crisis in bank lending is only making the economic outlook worse. As a result, the deficit will balloon further, leading to bigger spending cuts or higher taxes."

The figures showed a decline in output across all sectors of the economy. Manufacturing was down 0.3 per cent, while business services and finance fell 0.7 per cent.

Stephen Boyd, Scottish Trades Union Congress assistant secretary, said: "The economy's poor performance must be partly attributable to the fact that lending to businesses remains unchanged on a year ago. The government must start exerting control to match the size of its investment in failing banks and address this situation with genuine vigour."

However, Liam Byrne, Labour's Chief Secretary to the Treasury, said he was cautiously optimistic that growth could still return to the economy by the end of the year, as the Chancellor predicted in his April Budget.

"We are not out of the woods by any stretch of the imagination, but what today's figures show is that the pace of the downturn is easing," Mr Byrne said.