Prospects for the UK Economy

Extract

The scale of the recession in the UK is striking. The preliminary estimate of GDP suggests that the economy contracted by 1.9 per cent in the first quarter of this year, following contractions of 0.7 per cent and 1.6 per cent in the third and fourth quarters of 2008 respectively (figure 1). The detailed data on output suggest that the recession is widespread; only agriculture and government services recording growth in the first quarter of this year. The first quarter of this year probably saw the sharpest quarterly contraction since the second quarter of 1980. In addition the peak to trough fall to date is greater than any recorded since the Quarterly National Accounts were first published in 1955. Box A presents NIESR's monthly GDP series, which allows us to provide a monthly dating of the recession. The box includes a monthly GDP series for the early 1930s, and hence we are able to compare the profile of this recession with that period as well as the recessions of the early 1980s and early 1990s. There is a striking similarity between the current recession and the depression starting in 1929, although we do not expect GDP to continue to follow the path of that contraction. We expect the UK economy to return to growth in the final quarter of this year. Part of this growth is because consumers are expected to bring forward expenditure before the standard rate of VAT is returned to 17.5 per cent in January 2010. We expect the UK economy to contract by 4.3 per cent this year, but our forecast is that output will grow throughout 2010, leaving that year 0.9 per cent above the level for 2009. Even with a growth rate of 2.3 per cent in 2011, we expect it to take until the second quarter of 2012 to recover the previous peak level of output seen in the first quarter of 2008. This means that the duration of the depression (defined as output depressed below its previous peak) will be similar to that of the 1930s and 1980s.