UK economy shrinks at fastest rate in 61 years

Published on Tuesday 30 June 2009 22:03

THE UK economy has contracted at its fastest rate for half a century, casting fresh doubts on Gordon Brown's election strategy.

Output fell by 2.4 per cent in the first quarter of 2009, much worse than the 1.9 per cent predicted just a month ago, figures from the Office of National Statistics revealed.

The dire state of the public finances – which show the biggest year-on-year decline in the economy since records began in 1948 – pose a challenge to the Prime Minister's insistence that spending on public services will not be cut.

Chancellor Alistair Darling said in the Budget that the economy would shrink by 3.5 per cent by the end of the year, but yesterday's figures made it more likely that its decline would surpass four per cent, analysts said.

Official figures also showed that the economy slipped into a recession three months earlier than previously thought.

Revisions to figures revealed the current recession started with a 0.1 per cent decline seen between April and June last year compared with previous estimates of zero growth.

The construction industry took the biggest hit, slumping by 6.9 per cent, compared to a 2.4 per cent drop the previous quarter.

Services, which account for two thirds of the UK economy, fell by a steeper 1.6 per cent compared to 1.2 per cent the previous quarter.

As household income fell by 2.4 per cent, savings also dropped from 4 per cent to three per cent of income. The figures followed reports that there had been a Cabinet row over Mr Brown's attempts to tell voters that he would not cut public spending ahead of the election.

There was also tension after Business Secretary Peter Mandelson seemed to pre-empt the Chancellor by revealing that the government had delayed its comprehensive spending review until after the election.

Ministers are also believed to be furious over having to revise spending from their own departments to pay for Mr Brown's pre-election launch with his Building Britain's Future plan.

Liberal Democrat Treasury spokesman Vince Cable said the government needed a "reality check" on its spending promises. "Rather than making promises on public spending that nobody believes, the government must start taking tough choices on whether it is going to cut spending or raise taxes to bring the economy out of the red."

He said Labour predictions of a recovery were "fantasy".

Shadow chancellor George Osborne seized on the figures and warned that they showed other government forecasts, including unemployment levels, were also likely to be worse than trailed by ministers.

But Chief Secretary to the Treasury, Liam Byrne, said the government was still "confident but cautious" that the economy would recover next year.