The UK economy contracted in the fourth quarter at the fastest pace since 1980.

A report from the Office for National Statistics showed Friday that the British economy shrank 1.6% sequentially in the fourth quarter, revised down from a contraction of 1.5%. In the third quarter, GDP was down 0.7%. Two consecutive quarters of decline in GDP denotes a recession.

Thus, in the fourth quarter, the economy entered its first recession since 1991 and recorded the largest sequential fall since 1980.

Year-on-year, GDP declined 2% in the fourth quarter. According to the initial estimate, the economy had fallen 1.9%.

For the whole year 2008, GDP rose 0.7%, unrevised from the previous estimate.

Driven by a significant drop in manufacturing output, output of the production industries fell 4.5% compared with a fall of 1.8% in the previous quarter. At the same time, output in the service industries slid 0.8%, down from a fall of 0.5% in the previous quarter. Construction output decreased 4.9% over the quarter, which was revised down from a decrease of 1.1% published in the previous estimate.

Government final consumption expenditure rose 1.3%, while household expenditure fell 1%. Gross fixed capital formation was down 1.4%.

In real terms, the trade deficit decreased to GBP 7.6 billion in the fourth quarter from GBP 9.9 billion in the third quarter.

The ONS said the GDP expenditure deflator increased 2% from the fourth quarter of last year and slipped 2.1% sequentially.

In a separate report, the statistical office revealed that the current account deficit narrowed to GBP 7.6 billion in the fourth quarter of 2008 from a revised deficit of GBP 8.2 billion in the previous quarter. The fourth quarter deficit was equivalent to minus 2.1% of GDP compared with minus 2.3% in the previous quarter.

The lower current account deficit was the result of a higher surplus on trade in services, together with lower deficits on trade in goods and on current transfers, which outweighed a fall in the surplus on income.

Amid deepening recession, the number of people claiming jobless benefits logged a record monthly increase of 138,400 in February, while the number of unemployed crossed 2 million for the first time since 1997.

British industrial as well as manufacturing production declined in January at the fastest pace since 1981 signaling that the economy entered a deeper recession at the start of 2009. Annual decrease in industrial production was 11.4% compared to the 9.3% drop in the previous month.

The Inflation Report from BoE had said the economy would contract at an annual rate of 4% by the end of the first half of the year. In February, the International Monetary Fund said in a report that G-20 stimulus measures total 1.5% of GDP this year. The IMF added that the combined fiscal stimulus currently planned is expected to have a considerable impact on G-20 growth in 2009, of the order of 1/2 - 11/4 percentage points.

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