Growth figures dash hopes of Britain coming out of recession

It was the day when recession was supposed to turn to recovery, if only in technical terms. Instead the champagne corks stayed stubbornly uncorked in the City, as the latest official figures shocked analysts and showed that, far from following Germany, France, Japan and other major industrialised nations into expansion, Britain is mired in the longest downturn since the Second World War, and probably since the Great Depression.

Some analysts are now talking about the current conditions turning from recession to full-blown depression. As much as £100bn worth of output has been lost in this slump and the consensus among economists is that the level of output seen last spring will not be seen again before 2012.

The Office for National Statistics reported yesterday that the British economy shrank once again between July and September, with output down a further 0.4 per cent, completing a dismal 18 months of uninterrupted negative growth totalling almost 6 per cent of the economy – the longest period of decline since quarterly records began in 1955. The size of the British economy is now back to where it was when Labour won the last general election, in May 2005.

As the Treasury's forecast for the economy drifts ever more distant from reality, the figures promise further difficulties for the public finances, rising unemployment and renewed weakness in house prices.

The Chancellor, Alistair Darling, commented: "I've always said that it will take time to come through it, now our job is to support the economy as we come through toward recovery and whilst I've always said I didn't expect to see growth until the turn of the year, it will come. I'm confident about that."

George Osborne, the shadow Chancellor, replied that "this news has destroyed Labour's claim that Britain was better placed than other countries to weather the storms". For the Liberal Democrats, Vince Cable said the economy still faced "massive structural problems. It is critical ministers spell out a credible path as to how they will deal with the deficit."

Some economists cast doubt on the figures, which are based 40 per cent on real output numbers and 60 per cent on ONS estimates. While later revisions move the numbers up or down by around 0.1 or 0.2 per cent, it seems unlikely any changes will be sufficient to put the UK into a positive growth trend. Indeed, a further relapse early next year into a quarter or two of negative growth seems possible.

The figures are especially disappointing as the authorities have tried almost every policy measure to get the economy moving, including almost £1 trillion in support to the banking system, £175bn injection of money into the economy, cuts in VAT and stamp duty, the car scrappage scheme and measures to help the housing market.

Pressure on the Government to postpone tax rises scheduled for the new year – especially the jump in VAT on 1 January – in the pre-Budget report will grow. The Bank of England may also decide to expand its quantitative easing programme, designed to inject money directly into the economy, at the next meeting of the Monetary Policy Committee on 5 November. The Bank has almost completed its current run of "printing money".

The hard-pressed manufacturing sector has been in continuous decline for even longer – approaching two years – and has seen output fall by almost 15 per cent over the period, as has the building trade, devastated after the collapse of the housing bubble. The car scrappage scheme has helped ease the problems in the auto industry, new figures from the Society of Motor Manufacturers and Traders showed, but has not reversed it.

Few sectors recorded much growth – health spending was up, as were retail sales – but the volatile North Sea oil industry pushed the figures down. Analysts say the real weakness in the economy probably lies in the way businesses are savagely cutting their investment in new plant and equipment. If so, that will mean lower productivity and growth for years to come. Bank lending to smaller and medium-sized businesses remains scarce and expensive. Recessions caused by financial crises tend to last longer, because business stays starved of funds for longer than in other downturns.

Overall, the economy has lost around £65bn in lost output since it stopped growing in spring last year. Had the economy continued to expand at anywhere near its normal pace we would now be enjoying a colossal £100bn extra per annum in goods and services – equivalent to the NHS budget. Instead Britain has suffered an agonisingly protracted downturn as a result of her previous reliance on the housing market and the City for her growth, and the credit crunch has turned those old strengths into pernicious weaknesses.

France, Germany and Japan all emerged from their recessions in the second quarter of this year. Most observers agree that the UK may well return to some sort of growth in the last quarter of the year, especially if consumers bring forward purchases ahead of the VAT change, but the general expectation is for the recovery to be feeble, as well as late in arriving.

Fears centre on prospects for the jobs market. John Philpott, chief economist at the Chartered Institute of Personnel and Development, said: "The UK is continuing to shrink, making this recession look more like a depression. This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun. There are already 600,000 fewer people in work than at the start of the recession, one in three employers operating pay freezes for staff and one in 10 having already cut staff pay. "Unemployment will continue to rise well into 2010. For most workers the pain of recession goes on and the subsequent 'jobs light-pay tight' recovery won't feel much better."

Case study 'I had to move back home'

*Shaun Richardson, a 26-year-old banker from Essex, has been struggling to stay in work. He left Bear Stearns to go to rival investment bank Lehman Brothers in November 2007. Bear Stearns was taken over three months later and his new employer collapsed within a year. "A lot of the colleagues I'd left behind at Bear Stearns were made redundant soon after so, initially, I thought I'd made a good move. But on 15 September Lehman Brothers went under and I was out of work.

"I had been due to sign a tenancy agreement on my first flat in London that day. It was my big move to the capital, a nice flat near London Bridge with some friends. I had been waiting for it for a long time. But instead of moving my belongings in there, I had to pack them up and move them back to my old room at my parents' house.

"It has been just over a year since I moved back home. In August, I was again about to sign a contract for a house in Clapham but the three-month contract I had taken up at JP Morgan was not renewed and, again, I was disappointed. The jobs market had been quite quiet up until the last few weeks but recently I have been given a few more interviews. I wonder if the companies decided to recruit in anticipation of the recession ending. I hope they won't change their minds now that it hasn't.

"Over the last year, it has felt like every time I get back on my feet, something new hits me and I hope this news is not the latest chapter in that story."

Case study 'I went to find pitta birds'

*Chris Gooddie, 42, from London, used the recession as the perfect excuse to pursue his life's ambition. He had long dreamed of leaving his job selling music equipment to travel the world in search of one of its most beautiful birds, documenting his search in a book. "I had wanted to go on the trail of the pitta bird for a long time and never thought I actually would. But then the recession came along and it became obvious that it was going to be a difficult time whatever I did, so I just thought, why not?

"I hope to go back to the same industry after I finish my travels. Some of the skills I have learnt recently are very transferable. I'm aware that I may have to go back into the industry at a lower level than I was at when I left or I may have to go into a completely different industry altogether. But I am a relatively highly trained, highly skilled worker, so I'm not too worried about finding something. I would certainly not change anything about the seven months I have spent travelling so far.

"I may have burned the majority of my savings but I have had experiences most people will never have. Those are priceless. And my book, The Jewel-thrush Diaries, should help replace some of the money I've spent."