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GDP declines for fifth quarter running

Preliminary figures for the second quarter of 2009 show that UK GDP fell by 0.8%. This compares with a decrease of 2.4% in the first quarter.  Most forecasts were surprised by the drop as many had been expecting a fall of about 0.3%.


This means that the UK economy has now contracted for the fifth consecutive quarter and has fallen by 5.6% over the past year twelve months, which is the worst annual decline since 1955 when comparative records began.


The Treasury predicted in April’s Budget that the economy would contract by 3.5% during 2009 which means that any upturn will now have to be much stronger than previously anticipated. If the predicted figure is not reached this will have an important effect on the level of both the amount of money coming in from taxation and the amount going out on welfare benefits. This leads to the possibility that public sector net borrowing may have to exceed the projected £175bn for the current fiscal year.


The recent trend in GDP can be seen in the figure below.


Source: ONS

Source: ONS

What sectors contributed to the ongoing fall in GDP? Well, most sectors were affected. The construction industry bore the brunt of the decline falling by 2.2% in the second quarter. Manufacturing also continued to fall by 0.3% and even the service sector, which is the most important in the economy, fell by 0.6%,


It will be interesting to see whether the Bank of England decides to increase its programme of quantitative easing. It still has the capacity to inject a further £25bn into the economy out of the original £150bn that the government gave it permission to use. On top of this the Bank could ask to raise the total amount of increased money flow which it has been injecting into the economy above the level which has already been sanctioned.

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Posted in Bank of England, economic growth, GDP, government borrowing

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