UK Shrinks in First Quarter, Sharpest Fall Since 1979

Britain's economy shrank at its sharpest rate in 30 years in the first three months of 2009 and more dramatically than expected, official data showed on Friday, suggesting the recession may be deeper than feared.

The Office for National Statistics said gross domestic product fell 1.9 percent on the quarter in the first three months of this year, the biggest fall since Q3 1979 and worse than forecasts for a 1.5 percent contraction.

Most analysts had expected the 1.6 percent fall seen in the last quarter of last year to mark the low point of the recession.

"The figures suggest that the recession has so far been even deeper than previously thought," said Vicky Redwood of Capital Economics. "It's early days yet, but the drop opens up the possibility of GDP in 2009 as a whole falling by even more than the 4 percent we currently expect."

On the year, Q1 GDP fell by 4.1 percent, the biggest annual drop since the end of 1980. Analysts had expected a 3.8 percent contraction.

The Q1 figures are the first for a G7 country and highlight the downside risks to finance minister Alistair Darling's Budget forecast this week for a 3.5 percent contraction this year and a rebound into growth in 2010. He had expected Friday's data to show a similar GDP drop to Q4.

"For that (forecast) to be achieved, GDP would have to be broadly flat from Q2 onwards — yet the surveys are already pointing to another fall of 1 percent or so in Q2," Redwood said.

Sharon Lorimer

Darling also predicted the economy will start to recover by the end of this year, but Friday's data indicate policymakers may need to do more to kick-start the economy.

The Bank of England has already slashed interest rates to a record low of 0.5 percent and started buying assets with newly-created money.

The government pumped 20 billion pounds into the economy in November but the dire state of the public finances restricted any further big stimulus measures in Wednesday's Budget.

The ONS data showed the biggest quarterly fall in manufacturing output since records began in 1948.

Overall production fell 5.5 percent on the quarter, the biggest drop since 1974.

Output in the dominant services sector recorded its biggest quarterly fall since 1979.

Business services and finance, which account for 30 percent of total GDP, recorded the biggest drop in output since records began in 1983.

Separate data showed an unexpected rise in retail sales on the month in March driven by strength in clothing and food sales.

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