UK in recession after Q3 contraction

LONDON: Britain's economy contracted by 0.4% in the third quarter of 2009, dashing hopes of a recovery after five straight quarters of decline and piling fresh trouble for the beleagured Labour government struggling to steer the country out of the longest recession since records began some 60 years ago.

The picture for Britain is particularly unflattering given that it will be the only one among G7 economies to remain in the economic doldrums -- neighbours France and Germany turned the corner with positive growth last quarter along with Japan and Canada and US are almost certain to move out of the negative zone.

Instead of moving out of recession, Friday���s data raised the dreaded spectre of a depression, shocking economists and battering the Sterling. The UK's GDP has shrunk by 5.9% from the first quarter of 2008.

���This is a sharp decline, and we don���t normally get GDP forecasts so wrong," said George Buckley, chief UK economist of Deutsche Bank, adding that the services sector, notably distribution and hotels "where we don���t get that much detail" was to blame for the dismal performance.



Ahead of the official data, economists had almost unanimously expected a small rise in GDP, with forecasts ranged between between zero and + 0.7% and the consensus at + 0.2%.

Chancellor of the Exchequer, Alistair Darling, speaking from the once-famous mining town of Newcastle, one of the regions worst hit by the downturn, put on a brave face, insisting that he was confident about a turnaround by the end of the year.

���I���ve always said the improvement will come at the turn of the year, we are not yet out of the woods,��� Mr Darling said.

UK���s shock figures come at a time other Eurozone indices are looking up, with the Markit Eurozone flash composite index, a measure of private sector activity, at a 22-month high.

"This means the BoE will have to revise its GDP forecast downward, and we���re looking at stronger inflation in the short term, but weaker inflation in the medium term,��� Buckley at
Deutsche Bank said.

While the bencmark FTSE-100 shrugged off the negative data and held on to its 1% rise, the pound sterling wasn't that fortunate: it fell 3 cents against the dollar and 2 cents to the euro.

"This week���s fairytale rally for sterling has been stopped dead in its tracks and aggressive sellers are returning to the forex market once more,��� said Mark O���Sullivan,
director of dealing at foreign exchange firm Currencies Direct.

Besides casting a pall of gloom over an expectant market, the data is yet another blow to Prime Minister Gordon Brown���s hopes for his Labour party at the next election. Labour is already trailing way behind the Conservatives in opinion polls with less than 8 months to go before a national election.

Shadow Chancellor George Osborne of the Conservative party took the opportunity to hammer home the point that Labour���s policies haven���t worked, although Mr Darling strongly defended the policy of huge economic stimulus funded through government borrowings and said it would be ���madness��� to retreat from that policy.

The general consensus among analysts is that Friday's data will put intense pressure of the Bank Of England to continue its Quantitative Easing (QE) ��� essentially printing money ��� programme, which has already pumped over 175 billion pounds into the markets.

But Chris Williamson, chief economist at Markit, said that may not be a wise course of action. ���We don���t think the situation is that bad, from what we���re seeing from the manufacturing data and talking to companies. We���re entering a phase of growth ��� the risk at this stage is that this might mean an extension of the QE programme, and we think that will be a policy mistake. The situation doesn���t warrant an extension of the QE.���