Financial News

Tuesday June 30, 02:00 PM
Economy shrinks fastest in half a century

By Ben Perry

LONDON (AFP) - The recession-battered economy shrank at its fastest pace in more than 50 years during the first quarter of 2009 in the worst global slowdown in decades, revised official data showed on Tuesday.

Gross domestic product (GDP) contracted 2.4 percent in the first three months of the year compared to the final quarter of 2008, the Office for National Statistics (ONS) said in a statement.

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Despite the worse-than-expected data, analysts predicted a brighter future for the economy as figures showed house prices recovering, helping to offset news that state-owned Lloyds Banking Group (LSE: LLOY.L - news) will slash hundreds more jobs.

"GDP in real terms fell by 2.4 percent (in the first quarter) compared with the previous quarter, revised down from last month's estimate of 1.9 percent," the ONS said in its statement.

"This is the largest decrease since the second quarter of 1958. Around half the revision ... is a result of new construction output data, while the remainder reflects more complete data for services," it added.

On a year-on-year basis, the economy declined by 4.9 percent in the first quarter, the largest contraction since records began in 1948, and compared to the statistic office's earlier estimate of minus 4.1 percent.

Neighbouring Ireland's economy meanwhile shrank by 8.5 percent in the first quarter of 2009 compared to the same period in 2008, as the eurozone member was hammered by the financial crisis, separate official data showed on Tuesday.

The former "Celtic Tiger" economy has been savaged by the global financial crisis and the collapse of a domestic property bubble. Last September it became the first eurozone member to fall into recession in the current downturn.

Like Britain, Ireland is also suffering from soaring unemployment. State-controlled Lloyds Banking Group on Tuesday said it would cut 2,100 more jobs as it looks to recover from the worst financial crisis since the 1930s.

Lloyds, which is 43-percent owned by the taxpayer after a huge bailout, has now slashed around 7,000 jobs since its creation in January, when Lloyds TSB bought rival lender HBOS in a government-brokered deal.

Fallout from the banking crisis sent the country into recession during the second quarter of last year, not the third as previously thought, the ONS said Tuesday.

The ONS said GDP had stood at minus 0.1 percent in the second quarter of 2008 rather than showing flat growth. It also revised its figure for the fourth quarter, saying the economy shrank by 1.8 percent as opposed to an original estimate of 1.6 percent.

"Even deeper contraction in GDP in the first quarter is obviously unwelcome news, but it is also old news and matters have moved on appreciably since then," Howard Archer, chief Britain economist at IHS Global Insight, said on Tuesday.

"The good news is that the economy probably at worst contracted only modestly in the second quarter and it is not inconceivable that it managed to eke out marginal growth."

Ahead of the latest GDP data, home-loans provider Nationwide said house prices had increased by 0.9 percent in June from May.

"House prices have now risen in three of the last four months, suggesting that the improvement that began to show up in March represents more than just statistical noise," Nationwide's chief economist Martin Gahbauer said in a statement.

Economists' consensus forecast had been for a 0.5 percent drop in house prices in June compared to May.

"On balance, the stabilisation of house prices is a welcome surprise that did not seem likely at the beginning of the year," said Gahbauer.

"However, there are still considerable headwinds facing the demand side and until we see a more robust recovery in house purchase activity, it is too early to be confident about a full-scale recovery of prices," he added.