FTSE in freefall as figures reveal UK economy has shrunk by 0.5% - the first drop for 16 years

By Nicola Boden and Sam Fleming

Last updated at 12:47 PM on 24th October 2008

• Economy outstrips forecasts to shrink by 0.5%
  
• Shares and Sterling plunge as data is released
  
• Downturn 'will be worst for 50 years', expert warns
• It's a 'once in century credit tsunami', says Greenspan
• Asian markets tumble for a third day amid global fears

Britain is officially on the brink of recession after new figures revealed the economy has shrunk for the first time in 16 years.

Output dropped by 0.5 per cent between July and September in its biggest decline since the end of 1990 when the country was emerging from the last downturn.

The scale of the slowdown astonished analysts who had predicted a decline of less than half that, at 0.2 per cent.

Stocks and the pounds tumbled further after the data, which shatters Gordon Brown's claims to have ended Britain's record of 'boom and bust', was released.

It is now almost inevitable the UK will be in technical recession - classed as two quarters of negative growth, by the end of the year.

Gloom: Britain is now officially on the brink of recession after the economy shrank by 0.5 per cent in the past three months

The Prime Minister's spokesman said today: 'Clearly, these are very difficult times for the global economy.

'In the past year we have seen two unprecedented shocks - the first credit crunch since the 1930s and a record surge in food and energy prices. It now looks as though our economy is moving into recession as well.'

Chancellor Alistair Darling added: 'It will be a difficult period, but I am absolutely confident we will get through it.

'We want to help people get through this period, putting more money in their pockets. We have also got to make sure in the medium term that we live within our means.'

Shares were down nine per cent after the figures emerged, having already shed five per cent in early trading amid fears the downturn could be the worst for 50 years.

The data also pushed the pound to a new low of $1.55 amid speculation rates will now have to be slashed more than expected.

There were also huge losses on Asian markets overnight as fears of a global recession intensified due to signs the credit crunch is now hitting emerging markets.

HSBC and Standard Chartered were among the worst affected stocks in the UK this morning because of their heavy involvement in those areas.

Disbelief: Traders on the floor of the Stock Exchange in Japan today struggle to believe their eyes as stocks plunged 9.6 per cent

The last time the economy shrank was back when Tory Prime Minister John Major was in power and before the Black Wednesday plunge. 

Output in manufacturing, construction and, most surprisingly, the services sector - which makes up 75 per cent of GDP - were all down as the economy ground to a halt.

Both the manufacturing and construction industries are now officially in recession after a consistent decline across the last six months.

Manufacturing, which makes up around 14 per cent of GDP, fell another one per cent to September on top of 0.9 per cent last quarter. Construction shrank by 0.8 per cent on top of a previous decline of 0.5 per cent.

The powerhouse services sector suffered its biggest drop for 18 years, dropping from 0.2 per cent growth three months ago to be 0.4 per cent in the red.

Vicky Redwood, of Capital Economics, described the data as 'truly shocking'.

'The fact that a recession is already under way isn't a surprise...  but the fact that output has shrunk so much so early on in the downturn is clearly worrying,' she said.

'We expect the economy to contract for around two years in all, with a peak to trough drop in output of 1.5 per cent or even more.'

Busted: Today's figures shatter Gordon Brown's claim that he abolished Britain's boom and bust economics during his tenure as Chancellor

Tory leader David Cameron attacked the Government for failing to prepare the country for leaner times.

'This is the day the recession became real. We have had 10 years of a Government saying no more boom and bust,' he said.

'We have had 10 years of a Government not putting aside money for a rainy day. Well, that rainy day has now come.'

He insisted Britain would recover but that steps must be taken to 'rebalance' the economy and help out small businesses.

Liberal Democrat leader Nick Clegg warned that the country could be on the verge of a new 'winter of discontent' and called for tax and rate cuts to help struggling families.

Former Bank of England official Danny Gabay said last night that he believes the downturn could be the worst to hit the UK for decades - possibly ever.

The trend in recent decades has been that each recession has been progressively worse, both in depth and duration, he said.

Mr Gabay, a respected figure who now works for City consultants Fathom, said Britain has suffered seven recessions since the mid-1950s.

Under pressure: Bank of England Governor Mervyn King. Today's figures will encourage policymakers to slash rates by even greater levels

The average length has been nine months, but the past two, in the beginning of the 1980s and the beginning of the 1990s, both lasted for more than a year.

'It is hard for us to think that the coming one will be milder than the average of the past,' he said.

'Indeed, the coming recession will combine elements of the 1990 housing-led recession and some elements of the 1970s oil shock-led decline. 

'With a great big global credit squeeze layered on top, it could very well break records.'

Adding to the gloom, former U.S. Federal Reserve chairman Alan Greenspan called the financial turmoil a 'once in a century credit tsunami'.

He said the implosion of western banking giants had left him in 'a state of shocked disbelief'.

Yesterday, stocks swung wildly between gains and losses in the City and on Wall Street as the febrile mood battered markets.

The mood infected Asian markets overnight, with Japan's Nikkei closing down 9.6 per cent at 7649.08, the first time it has fallen below 8,000 since May 2003.

Shares plunged after electronics giant Sony announced it had halved its full-year profit forecasts.

South Korean stocks were down a similar margin - 10 per cent - after Samsung said its three-quarter profits were down 44 per cent, ending a record week of decline.

Indexes also plunged in Hong Kong, Singapore, Sydney and Mumbai. At a summit in Beijing, Asian leaders agreed a $80billion emergency fund to help ailing economies.

And in Europe, German stocks were down five per cent and French stocks four per cent in early trading.

Oil prices bounced back above $69 a barrel yesterday as the Arab-dominated oil cartel OPEC prepared to slash supplies to force up the price of crude.

Amid the global gloom, both the Prime Minister and Bank of England Governor Mervyn King have warned this week that a downturn is all but inevitable.

The Bank of England is under pressure to slash rates sharply to alleviate some of the pain but if sterling continues to fall, it could restrict Governor King's room for manoeuvre.

A weaker currency drives up the cost of imports and therefore inflation, restricting scope for rate cuts.

The Bank lowered its official rate by a half point to 4.5 per cent on October 8. Minutes from its emergency meeting on Wednesday suggested that another cut could be on the cards as soon as next month.

The financial turmoil has also now spread even further across the world as emerging markets suffer from the credit contagion.

Iceland, Pakistan, Hungary, Ukraine and Belarus have all been forced to ask the International Monetary Fund for loans to prop up their economies. 

Traders also voiced concerns about the health of Russia's economy, which is heavily dependent on oil and gas exports. 

Last night Lord Mandelson vowed that ministers would not 'wrap our heads in a blanket' and hope the global recession would go away.

The Business Secretary told private and public sector professionals at the Northern Regeneration and Renewal Summit in Manchester that Gordon Brown would lead the country through the 'storms' of the current financial climate.

Greenspan's 'Tsunami'

Alan Greenspan, the man once hailed as one of the most accomplished central bankers in U.S. history, admitted last night that he had been taken by surprise by the 'once-in-a-century credit tsunami'.

The former U.S. Federal Reserve chairman said he was in 'a state of shocked disbelief.'

Mr Greenspan, who headed the central bank for more than 18 years, told a Congressional committee the financial crisis had 'turned out to be much broader than anything I could have imagined.'

Gloom: Former chairman of the Federal Reserve Alan Greenspan called the turmoil a once in a century tsunami

He has been blasted by critics who claim he left interest rates too low for too long, spurring an unsustainable housing boom, and failed to crack down on sub prime mortgages being handed to people who did not satisfy conventional borrowing requirements.

It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

Asked point-blank whether he had been wrong in failing to intervene, Mr Greenspan admitted only that he had been 'partially wrong' in the case of credit default swaps, complex trading tools meant to act as insurance for bond buyers against default.

It was the closest he got to accepting any blame.

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