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UK still mired in recession

By Daniel Pimlott, Economics Reporter, Financial Times
Holiday shoppers pack the High Street in Nottingham despite reports the UK economy is still in recession.
Holiday shoppers pack the High Street in Nottingham despite reports the UK economy is still in recession.
STORY HIGHLIGHTS
  • The UK economy shrinks by 0.2 per cent in third quarter
  • Country still remains in recession
  • Economy declined by 6 per cent since peak in the first quarter of 2008

(FT) -- The UK economy shrank by 0.2 per cent in the third quarter as consumers' incomes rose but they saved more, data published on Tuesday showed.

In spite of sharp upward revisions to output from the construction sector and to business investment spending, the data were only slightly changed from the earlier estimate that the economy contracted by 0.3 per cent in the quarter.

The smaller than hoped for revisions mean that the UK remained mired in recession during the quarter, because output in manufacturing and the services sector was weaker than originally thought.

Overall, the economy has declined by 6 per cent since the peak in the first quarter of 2008, following revisions to earlier quarters, making the current downturn by a small margin the deepest recession since the second world war.

Failure to emerge from recession in the quarter leaves the UK lagging behind Japan, Germany, France and the US, which have all returned to growth.

The third reading of the quarterly gross domestic product figures laid out how incomes changed among consumers and businesses during the quarter.

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Real household disposable income rose by a healthy 1.2 per cent during the quarter, after a rise of 1.7 per cent in the previous quarter. Income is up 5.2 per cent over the year.

The strength of incomes despite the continued contraction in the economy came amid higher dividend payments from companies to individuals.

It also reflected business owners investing less during the downturn but managing to draw income from selling off existing inventories of goods.

The higher incomes helped the saving ratio to rise to 8.6 per cent, from an upwardly revised 7.6 per cent in the second quarter. The ratio has shot up during the recession and is now at its highest since 1997 as consumers are less able to borrow and lower interest rates have helped support incomes.

The pace at which the saving ratio has risen -- after averaging 1.7 per cent in 2008 -- is a sign that the economy has moved some way towards rebalancing away from high levels of borrowing. But if consumers cut back too far, it could limit the ability of the economy to recover.

Neville Hill, an economist at Credit Suisse, said the rise in the savings ratio was evidence of "how brutal the adjustment in consumer behaviour has been".

The current account deficit was also revised down sharply, another hopeful sign that the UK economy is moving towards higher levels of exports relative to imports.

"The sharp rise in the household saving ratio ... might suggest that the process of household deleveraging is further advanced than previously thought, while the current account deficit has been revised down sharply," said Jonathan Loynes of Capital Economics.

"On the face of it, those changes certainly make the economy look rather better balanced than before."

The GDP figures had been expected to be revised to show a 0.1 per cent fall, after previously published revisions to construction and business investment data had produced a more rosy picture of the economy in the quarter.

But they were offset by downward adjustment to data on the output of the production industries, which contracted by 0.9 per cent in the quarter -- slightly weaker than originally thought.

The services sector contracted by 0.2 per cent, more than the 0.1 per cent initially estimated.