The threat of Britain entering a deep and prolonged recession – at least as painful as that of the early Nineties – became more likely yesterday after official GDP figures showed that the economy was in an even worse state than the City had expected.

The scale of the downturn revealed by the grim data increased economists’ worries that the country is set to bear the brunt of a global recession and will fare far worse next year and beyond than its leading international competitors.

The 0.5 per cent fall in national income and output in the third quarter revealed by the GDP numbers was more than twice as sharp as the more modest 0.2 per cent that the City’s number-crunchers had been forecasting. It came after a quarter of zero growth in the previous three months, when economic activity stagnated.

The worse-than-expected figures gave added weight to predictions that the economy will slump in the final quarter of this year, and through much if not all of next year.

Officially, recessions are defined as two quarters in a row of falling GDP and a new recession in Britain will be confirmed only if output continues to tumble from now until the end of the year. But, with a further steep drop in output and income across the economy now seen as inevitable, most economists consider that Britain is already in the grip of recession.

The threat of a brutal downturn driven by a retreat by hard-up consumers from the high streets and the nation’s bars and restaurants was borne out by the detail of yesterday’s figures.

After both the Prime Minister and Mervyn King, the Governor of the Bank of England, admitted for the first time this week that the economy was probably entering a recession, every part of the economy except the farming, fishing and forestry industries and the public sector was contracting.

Over the past three months, manufacturing shrank by 1 per cent, output from utilities fell by 1 per cent, construction contracted by 0.8 per cent and the services sector, which makes up three quarters of the economy, shrank by 0.4 per cent.

But the City’s experts were most shaken by the drastic collapse in the retail, wholesale, hotels and restaurants sectors, which shrank by 1.7 per cent over the past three months, registering their sharpest decline for 18 years.

The influential National Institute of Economic and Social Research (NIESR) predicted this week that consumer spending would fall next year by 3.4 per cent. The think-tank forecast that with this the economy would shrink by 0.9 per cent in its worst contraction since 1991, when GDP fell by 1.4 per cent.

Anxieties that consumer spending will crumble come after the past year’s squeeze on households and as soaring living costs, weak growth in incomes, slumping house prices and a continuing credit drought provoke a sharp, consumer-led downturn.

In figures reported yesterday, UKValuation, a property data business, revealed that one in twenty properties sold in August went for less than the owner paid for them.

George Magnus, senior economic adviser at UBS, expects that yesterday’s steep fall in GDP “is only the beginning” of much worse news to follow. He added: “I think this recession is going to go on for quite a long time, perhaps through next year, maybe even to the beginning of 2010.

“And, in that sense, it is going to look quite nasty compared with the two recessions that we had at the beginning of the Eighties and the beginning of the Nineties.”

Sushil Wadhwani, a former member of the Bank of England’s Monetary Policy Committee, also fears a protracted recession. “I think in the fourth quarter and the first quarter of next year we are likely to see a remarkably steep downturn,” he said. “I think we are going to end up being surprised by the suddenness by which output drops over the next two quarters . . . it could turn out to be quite frightening in terms of its impact on confidence.”

Hopes of staving off a recession as deep and protracted as those in the early Nineties and early Eighties now rest on expectations of sharp cuts in interest rates by the Bank and plans by the Chancellor to bring forward future public spending in his impending PreBudget Report. However, the NIESR and City economists have cautioned that these measures are likely to have only a limited effect and that it is probably now too late to prevent a potentially sharp recession.

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