UK economy already in recession, say experts

Bank of England governor Mervyn King might have warned today that a UK recession was “likely” but an army of other experts firmly believe the economy is already in a downturn.

Respected bodies such as the European Commission, the Organisation for Economic Development and business lobby group the CBI have said the UK economy started shrinking in July.

They have cited the stuttering housing market, rising energy bills and the credit squeeze that has hampered lending to home-owners and businesses for the drag.

The latest warning came at the weekend from forecasters at the Ernst & Young ITEM club, who said the economy was already in recession and will shrink by 1% next year.

Official data showed the UK economy was flat in the second quarter this year, the first time it failed to grow for 16 years. The Office for National Statistics will reveal how the third quarter fared this Friday, with most experts predicting the economy to have contracted by 0.2%.

A raft of recent economic statistics have pointed to slowing activity since July, including spiralling unemployment and a marked reversal for the UK’s dominant service sector which makes up around three-quarters of the economy.

One survey showed the sector shrank at its fastest rate for more than 12 years last month to post its fifth consecutive month of decline.

The Chartered Institute of Purchasing and Supply’s (CIPS) services index, which measures overall activity for the industry, was 46 in September. A reading below 50 signals industry contraction.

It was down from 49.2 in August, the biggest drop since the series began in 1996.

Official data from the Office for National Statistics (ONS) also showed the country’s service sector failed to grow during the three months to July for the first time since August 2002.

In evidence of tighter household budgets, hotels and restaurants suffered the biggest downturn during the period, the ONS said.

Howard Archer, chief UK economist at Global Insight, said: “The sharp decline in service sector activity in September leaves little doubt that the economy contracted in the third quarter and is on its way into recession.”

To make matters worse, the British Retail Consortium said high street sales – a big economic driver – fell 1.5% in September.

Elsewhere in the economy, output in the manufacturing sector fell for the sixth consecutive month in August to record its longest period of decline for 28 years.

Output in the sector dropped 0.4% during the month, double the 0.2% drop expected by analysts. The last time output fell for six months in a row was between July and December 1980.

Other more discernible data has also worsened dramatically in the past months.

New car sales in September plunged more than 21% year-on-year to their worst level since the 1990s recession.

House prices have been falling at their fastest rates since the early 1990s downturn.

And unemployment also staged its biggest quarterly rise since the summer of 1991 between June and August, jumping 164,000 to 1.79 million.

Most forecasters expect the jobless number to reach two million by Christmas - the first time it has been as high since 1997.