UK 'last to get out of global slump'

The British economy shrank by 0.4 per cent in the third quarter of 2009 – the sixth consecutive phase of decline. The data marked the worst recession since records began in 1955.

Other major economies are already recovering or escaping the recession entirely.

China and Australia both avoided recession, while Germany, Japan and France all resumed growth in the second quarter of this year. The United States is expected to emerge from recession when new figures are published next week.

The dire gross domestic product (GDP) figures also undermined Chancellor Alistair Darling's forecasts that the UK would be out of recession by the turn of the year.

And in another blow to the Chancellor, economists warned that even his gloomiest Budget forecast – that the UK economy would contract 3.75 per cent this year – would be too optimistic.

Simon Kirby, an economist at the National Institute for Economic and Social Research, said the UK would need a "stunning" 4.4 per cent surge in its GDP in the final quarter for Mr Darling's predictions to be on track. He said: "We may see some growth in the final few months as people rush to make the most of the VAT cut before the tax rises next year but it is highly unlikely that his forecast will be met."

Mr Kirby warned: "Any recovery is likely to be very fragile and unpredictable."

He added that tax rises and further borrowing could also be on the cards as the government seeks to bring the budget back into balance.

Economists also seized on data showing the UK was languishing behind its international counterparts. Only Spain is now in a similar position. The United States is due to release its GDP figures next Thursday.

While its unemployment rate, at nearly 10 per cent, is higher than the UK's, official figures are expected to show that the US has managed to pull itself out of recession.

Howard Archer, an economist at IHS Global Insight, said the GDP figure was "a real shocker and desperately disappointing" for Britain, particularly when the global picture was taken into account.

"It is impossible even to take comfort from the fact that the rate of contraction moderated, especially as the eurozone and the US seem highly likely to have grown in the third quarter."

ING economist James Knightley said the third-quarter data was "awful, with no positive news within the report".

He predicted that the pound would weaken further, adding: "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."

But others cast doubt on the figures, which are often revised once firmer data comes through in two months time.

Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said: "It appears that the ONS has made some fairly conservative assumptions about September output data, and once more data is available there is a strong possibility that the third-quarter figures will be revised up, possibly to -0.1 per cent or 0 per cent."

Mr Darling also stood by his forecasts – "cautious" about recovery but "certain" confidence was improving.

The economy was "not out of the woods yet", but the Chancellor believed that confidence was beginning to return in many areas.

"I stand by what I said. I believe the economy will begin to grow by the turn of the year," he said.

But he also indicated that he would raise VAT next year and that the cut in duty was always a temporary measure.

He declined to say whether it would simply go back up to 17.5 per cent, or whether it would be even higher than its original level once the fiscal stimulus measure was reversed.

A former member of the Bank of England's monetary policy committee, Professor David Blanchflower, urged the Chancellor to rethink his VAT rise.

"The government has been doing the right things, putting in stimulus. My view is that they need to do more," said Prof Blanchflower. "Perhaps a further fiscal stimulus, and we certainly need the MPC to do more quantitative easing.

"The government must think about not putting the VAT increase back."

He said "now is the time to do more, not do less", and added that "the public-sector stimulus has kept us from falling off the cliff".

Shadow chancellor George Osborne contrasted the figures with previous boasts by the government that the UK would be one of the least affected countries.

"We need a change in direction to get the country working again," he said.

"Britain is now in the deepest and longest recession in its modern history. This news has destroyed Labour's claim that Britain was better placed than other countries to weather the storms."

Vince Cable, the Liberal Democrats' economics spokesman, warned that the economy still faced "massive structural problems".

He added: "It is critical ministers spell out a credible path as to how they will deal with the deficit."

While the UK's economy was contracting overall, recent figures suggest that Scotland is faring even worse.

Its economy contracted by 0.8 per cent in the last quarter – a smaller decline than the 0.6 per cent in the previous three months, but still double the UK average.

Scotland's economy has now shrunk for four consecutive quarters, taking its annual contraction to 3.2 per cent.

Economists had expected yesterday's update from the Office for National Statistics to show a modest return to growth across the UK. However, the drop was large enough to take the total fall in output since the start of the recession to 5.9 per cent.

The economy contracted 5.2 per cent, compared with the same period last year, which was better than the record figure of 5.5 per cent in the previous three months.

Most of the hit was taken by the service sector, which accounts for almost three-quarters of Scotland's economy. It was expected to register growth, but contracted by 0.2 per cent.

Despite a weak sterling, industrial production shrank by 0.7 per cent and is down by 13.7 per cent since the start of the recession.

Output from retail, wholesale, hotels and restaurants also fell by 1 per cent over the quarter.

The persistent decline comes despite the government fiscal stimulus package and Bank of England's quantitative easing.

Measures have included interest rates at a record low, to try to encourage heavily indebted UK consumers to keep spending.

An unprecedented 175 billion has also been bumped into the money supply and billions more through fiscal measures. But that cash is expected to have run out by next week and the Bank will not meet again to discuss another round of stimulus until 4 November.

The surprisingly weak figures have now fuelled speculation that the Chancellor could try to delay his Pre-Budget Report, which would normally take place in late November.

There is one silver lining for borrowers, however. The Bank of England is now more likely to keep the base rate at its historically low level.

Government debt and taxes are both expected to rise, however, to make up for the steep decline in GDP.

UNITED STATES: THE US is expected to show a return to growth when its figures are released next Thursday. Like the UK, it was severely hit by the downturn in the housing market and banking collapse. Its unemployment rate is hovering at just below 10 per cent.

CHINA: The tiger economy escaped being officially plunged into recession. A fiscal stimulus package and patriotic campaign to buy Chinese-made goods rescued the economy, despite a steep 26 per cent decline in exports this spring.

INDIA: India's rampant economy is still growing and is set to expand by 6.5 per cent for the year through May. This is still slower than its previous annual growth rate of 8.7 per cent.

The impact of the global recession has hit India, but not as much as its competitors.

The government there has reduced taxes, while interest rates have been cut to pump more cash into the economy.

GERMANY: Europe's largest economy emerged from recession six months ago. The export-led recovery helped the country, which has always had a strong manufacturing base, and there has also been a rise in domestic demand. Generous welfare payments have also boosted the economy.

FRANCE: More reliance on the public sector and government spending has helped France to keep a tighter control over its economy. It is also less reliant on the financial services industry than the UK. Like Germany, France boosts its welfare packages when times are tough.

JAPAN: Despite struggling during the 1990s, Japan has emerged from the recession. A rise in demand for electronics helped the country recover, despite a steep decline of more than 15 per cent in the first quarter. The government's fiscal stimulus package helped to rescue Japan.

RUSSIA: Despite massive falls in its stockmarket and an economy that shrank by a tenth in the first half of this year, Russia is not in recession. High prices for its oil have helped the country. A strong rouble has also continued to attract investors.

SPAIN: The Spanish did not enter the recession until late last year, but they are predicted to stay mired in recession until next year. A massive unemployment rate of 17.9 per cent – compared with Britain's 7.9 per cent – has added to Spain's woes.

BRAZIL: The South American giant pulled out of recession in September. Brazil invested in large-scale public infrastructure projects and passed tax breaks for individuals and companies.

Its recession was comparatively short, amounting to just two quarters of negative growth.

CANADA: Canada has been affected by the massive crisis that threatened to derail its nearest neighbour. But despite unemployment continuing to rise, its economy is already out of recession. The country is expected to surge ahead of its competitors in the next year, thanks to its strong energy sector.

Slumps past

THE deepest recession for almost 30 years, triggered by the banking sector, has shrunk UK output by 5.9 per cent so far. The financial crisis and nationalisation of several banks has been the defining feature of the slump, which Lord Turner, right, the Financial Services Authority head, called a "crisis cooked up in trading rooms".

Here is a look at the characteristics and impact of past recessions:

3.4%GDP decline in 1973-74: Edward Heath's Tory government faced an oil crisis in 1973 after Opec stopped exports to western nations in response to the US support for Israel.

Heath fought a long battle against the National Union of Miners after trying to tackle inflation through lower pay rises. Dwindling coal stocks pushed up prices and led to the three-day week. In February 1974 – the recession's lowest point – he called an election, left, under the slogan "Who Governs Britain?" – and lost. A decade of near-stagnation lay ahead before Margaret Thatcher, right, finally broke the miners.

6%GDP decline, 1979-81: Margaret Thatcher's Conservative government unveiled a brutal package of fiscal medicine to tackle runaway inflation and deep public spending cuts – throwing the economy into reverse.

The Iron Lady gave an early display of her mettle with interest rates at 17 per cent in late 1979 as she showed her determination to tackle inflation – and trade unions, right – and bury the memory of the UK's humiliating IMF 1976 bail-out. VAT almost doubled.

Mrs Thatcher was divisive – worshipped and hated in equal measure – but the legacy of her early reforms was dole queues that stayed above three million until 1987.

2.5%GDP decline, 1990-91: The Lawson boom of the late 1980s ended abruptly in 1990 as interest rates were jacked up to tackle rising inflation. The UK's entry into the Exchange Rate Mechanism in 1990 linked the pound to the deutschmark to help keep a lid on inflation but hit the economy because maintaining the rate meant much higher interest rates – and soaring repossessions.

Markets reckoned the UK's high interest rates were unsustainable and bet against the pound, forcing a painful exit from the ERM on Black Wednesday in 1992. PM John Major was later accused of dithering by his ex-chancellor Normal Lamont, right. Rates were raised as high as 15 per cent.