LAST WEEK’s significantly worse-than-expected figures for gross domestic product prompted many economic pundits to downgrade their forecasts.

Malcolm Barr, UK economist at JP Morgan, pointed out that the decline in GDP in the third quarter was 2.2% at an annualised rate, the worst since 1990. He revised down his forecast of the economy’s likely contraction next year from 1.1% to 1.7%.

That would make it a weaker year for the economy than 1991, the worst year of the last recession, when GDP fell 1.4%.

“Surveys send a consistent message that, heading into the current quarter, output is falling at an accelerating pace,” said Barr. “Firms appear to be planning significant cutbacks in spending.

“Investment intentions for plant and machinery and for buildings have dropped sharply to levels last seen during the recession of the early 1980s.”

George Buckley, UK economist at Deutsche Bank, said he had previously thought the peak-to-trough fall in GDP in this recession would be 2.3%, slightly smaller than the 2.5% fall in the early 1990s.

But Chris Williamson, chief economist at Markit, which produces the monthly purchasing managers’ surveys for manufacturing, construction and services, questioned whether the third-quarter GDP figures were too downbeat.

“History tells us that revisions to these first estimates are not uncommon, especially in times of economic weakness,” he said. “There is a strong chance that the figure will be revised up at some point in the future.”

Certainly, several engineering companies believe the gloom is not bad enough to justify the steep falls in their share prices.

Babcock International, which runs naval dockyards and maintains railways, emerged largely unscathed from the credit crisis, thanks to most of its customers being in the public sector.

Three weeks ago, however, the company’s share price started to dive. From above 600p, it fell as far as 306p. It recovered slightly, finishing last week at 366p. Insiders are mystified by the collapse.

Shares in Senior, another engineer, have slid sharply over the past two months, losing more than half their value. Analysts said the fall had been caused by nervousness over the company’s exposure to the commercial aerospace market. It makes parts for Boeing and Airbus.

Chief executive Mark Rollins disagrees.“Boeing and Airbus have demand they can’t meet. The market would be strong even if there was a drop of 10%-15%,” he said.

Meanwhile, a consensus is solidifying around weak prospects for the housing market. The Centre for Economics and Business Research (CEBR), which has been more optimistic than most experts, will this week publish a new forecast suggesting that house prices will fall by 25% from their peak last year.

“Prices will fall by 25% peak-to-trough from the third quarter of 2007 to end of 2009,” said Ben Read, managing economist at CEBR. “This is despite our expectations that the Bank of England will cut its interest rate by one percentage point before Christmas will take it as low as 2% in autumn 2009, and that the government banking rescue package will start to ease mortgage availability within the next few months.

“We expect prices to be flat in 2010, after which they will rise by about 20% through 2011 and 2012 as fundamentals reassert themselves. Prices in 2012 will still be 3% lower than in 2007.”

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