Contraction in GDP is fastest in fifty years

THE UK economy contracted at the fastest pace since 1958 in the first quarter of 2009, raising expectations that the Bank of England’s Monetary Policy Committee could expand quantitative easing.

The Office for National Statistics said yesterday that it had revised downwards its estimate for first quarter GDP to -2.4 per cent from -1.9 per cent and it is now 4.9 per cent lower than the first quarter of 2008.

But economists are stressing that more recent data suggest an improvement in conditions. ING’s James Knightley said: “These figures are much worse than expected, but since we are now on the verge of starting the third quarter it should only provide a temporary knock to sentiment.”

The revisions were mostly down to new data for construction output, which is now expected to have fallen by 6.9 per cent compared to a previous estimation of 2.4 per cent. But recent purchasing managers’ indices point to a much smaller contraction in the second quarter as firms finish destocking.

While the view remains that the worst of the recession is behind us, David Kern, chief economist at the British Chamber of Commerce, said: “It is important to persevere with aggressive quantitative easing. At the same time, the government must urgently present a credible medium-term plan for restoring stability to our public finances.”

Investec’s David Page also thought that the revisions are likely to boost the case for further expansion of quantitative easing from the Bank of England’s MPC.