RTTNews - Friday, official data confirmed the worst contraction in the U.K. economy since the early days of the Margaret Thatcher government in 1979.

The economy shrank 1.9% in the first quarter compared with the previous quarter, unrevised from previous estimate released on April 24, the Office for National Statistics reported. This was the largest decline since the third quarter of 1979.

The economy had contracted 1.6% in the fourth quarter and 0.7% in the third quarter of 2008. Thus, gross domestic product dipped for the third straight quarter, signaling a severe recession.

Year-on-year, GDP was down 4.1% in the first quarter, much larger than the 2% decline seen in the fourth quarter. The statistical office confirmed the number for the first quarter.

On the expenditure front, household spending dipped 1.2% sequentially, marking the largest fall since the fourth quarter of 1980. Both goods and services contributed to the sequential fall, with goods seeing more weakness. By contrast, government expenditure grew 0.3%. Gross fixed capital formation dropped 3.8% versus a 1.4% fall in the previous quarter.

The level of inventories slipped GBP 6 billion in the latest quarter. At the same time, the deficit in net trade decreased to GBP 7.3 billion from GBP 7.6 billion in fourth quarter, as imports fell at a faster rate than exports.

The GDP implied deflator was up 1.8% from the same quarter of 2008 and down 2% from the previous quarter.

Regarding economic activity, Chancellor Alistair Darling in his budget statement said he sees a 3.5% contraction in 2009, the worst since the Second World War and expects the economy to resume growth by the end of this year and grow 1.25% next year.

BoE deputy governor for monetary policy, Charles Bean also shared a similar view. Earlier in the day, he said the bottom in economic activity may not be too far off.

Meanwhile, the central bank said in its inflation report that the economy would resume growth from early 2010 and reach around 2.5% in a two-year period. Governor Mervyn King sees relatively slow and protracted recovery in the UK economy.

Yesterday, the Standard & Poor's revised its outlook on the U.K. to negative from stable, assuming that general government debt burden would reach 100% of GDP even after assuming additional fiscal tightening.

David Kern, Chief Economist at the British Chambers of Commerce said the British government must address the medium-term risks facing the country's finances. However, while the downturn continues policy must remain expansionary.

BCC's Kern added that the fall in business investment underlines a danger that British industry would lack the potential to respond to an increase in demand when the recession ends.

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