The collapse in Britain’s economy now rivals the worst days of the Great Depression, it has emerged.
Economic output shrank by 5.6pc in the 12 months to the middle of the year, according to official figures which shattered hopes that the recovery has already begun.
The Office for National Statistics said that Britain’s gross domestic product (GDP) contracted by 0.8pc in the second quarter, following the unprecedented 2.4pc fall in the first three months of the year. Economists had expected GDP – the broadest measure of the country’s economic performance – to shrink by 0.3pc.
According to calculations by Martin Weale of the National Institute for Economic and Social Research the profile of the current recession is now almost identical to the decline in Britain’s output between 1929 and 1931. The 5.6pc contraction over the past year almost matches the 5.8pc fall in the year preceding the second quarter of 1931, during which Credit Anstalt in Austria collapsed, triggering a second wave of economic seizure across Europe.
The recession is far deeper and more severe than those of the early 1980s and 1990s, Mr Weale added.
“Gordon Brown is now competing with Ramsay MacDonald – not a comparison he would much like,” he said. “It looks as if we are pretty much tracking the 1930s,
“The financial crisis has been much bigger [than in the 1930s], the period of boom beforehand was more marked; and so you might think it’s thanks to the policies [from the Bank of England and Government] that we’ll end up with something slightly less bad but along similar lines.”
Markets nevertheless took the disappointing news in their stride, with the FTSE 100 rising for a tenth straight day by 16.81 points to 4576.61. Indeed, the 10.9pc increase in those sessions is the biggest uninterrupted increase since the index was set up in 1985.
The Treasury forecast in the Budget earlier this year that the economy would shrink by 3.5pc this year, but most independent forecasters, including the International Monetary Fund and OECD, expect a far more severe contraction. The ONS figures also cast doubt on whether the economy will start to grow again before the end of the year.
Michael Saunders, UK economist at Citigroup, said although he expects growth to return in the third quarter, the recovery will feel subdued.
“As well as a deep recession, we expect a slow recovery, held back by high private debts and (with inadequate bank capital) poor credit availability,” he said, adding that it would take until 2013 for the economy to reach the pre-recession peaks of 2008.
He added: “It will be many years before the UK returns to a well-balanced and sustainable mix of low unemployment, low fiscal deficit and low public debts, decent economic growth and low inflation.”
The GDP decline also casts doubt on whether the Treasury will achieve its borrowing targets for the year – even though the £175bn of debt forecast for this fiscal year is already set to be a post-war record deficit. The Budget assumed, when drawing up these borrowing figures that the economy would shrink by 3.75pc, at worst. A bigger fall would push the deficit up further, as it would imply lower tax revenues and bigger comparative public spending totals.
Liam Byrne, Chief Secretary to the Treasury, insisted that growth would return by the end of the year.
“We are not out of the woods by any stretch of the imagination, but what today’s figures show is that the pace of the downturn is easing,” he said.