'Shock' figures dash end of recession hopes » Central Government » 24dash.com

Hopes of a swift end to recession were shaken today after figures showed a far worse than expected 0.8% decline in the economy between April and June.

The UK's fifth successive quarter of recession was much deeper than the 0.3% forecast, stunning experts and business leaders.

The economy has slumped 5.6% since the second quarter of 2008, according to the Office for National Statistics' (ONS) estimates - the biggest fall since its records began in 1955.

IHS Global Insight economist Howard Archer called the figures "a really nasty and disappointing shock", while the Institute of Directors warned of a "long, slow path" to recovery.

Senior policy adviser Corin Taylor said: "It looks like this recession still has some way to go, and we don't expect growth to resume before 2010."

Although today's figures may be revised by the ONS when it has more data on the economy, it puts pressure on Chancellor Alistair Darling's forecast of a return to growth by the end of this year.

The economy has now shrunk by 5.7% since the first quarter of 2008, the ONS said.

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

Although today's figures bettered the sharp 2.4% contraction seen in the first three months of 2009 - the worst quarterly slump since 1958 - experts were hoping for a much bigger improvement in the economy.

A 0.7% fall in output from business services and finance - the worst since the ONS began measuring the sector in 1983 was the biggest driver behind the 0.8% second quarter decline.

The services industry - accounting for almost three-quarters of overall economic output - showed a 0.6% fall.

Construction industry output fell 2.2% over the quarter and is now 14.7% below the same period last year, which is the biggest fall since records began in 1948.

Production industry output - such as construction, mining and manufacturing - fell 0.7% between April and June, the ONS added.

Experts predicted that interest rates would remain at 0.5% well into 2010, while the Bank of England would soon drop its "wait and see" stance and resume efforts to boost the money supply through quantitative easing.

Mr Archer added: "The sharp second-quarter drop suggests that hopes of recovery over the coming months are based on even rockier ground."

David Kern, chief economist at the British Chambers of Commerce, said: "There is no room for complacency and suggestions of suspending quantitative easing are misguided.

"It is important to persevere with an aggressive policy stimulus to ensure that the economic downturn does not worsen."

Economists warned of an "extremely sluggish and protracted" exit from recession - due to the weakness of the banking sector, as well as likely tax hikes and spending cuts on the way to cut soaring debts and put the public finances back on a firmer footing.

Vicky Redwood of Capital Economics said: "Bank lending looks set to remain weak for some time. Although the timing is not yet clear, a severe fiscal consolidation is on its way at some point.

"Consumers and companies still need to reduce their debt levels."

Shadow Chancellor George Osborne said: "These disappointing figures are much worse than expected and show that the recession is longer and deeper than the Government had led us to believe.

"The sad news is this will mean the rise in unemployment is likely to be even steeper."

He added: "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."

Liberal Democrat Treasury spokesman Vince Cable 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.

"It's high time the Government came clean as to where these will be. The public understand that there are tough times ahead and they need to be given the story straight."