Britain's economy shrank during the third quarter of the year at a faster rate than previously thought, it was revealed today.

The Office for National Statistics (ONS) said gross domestic product (GDP) from July to September was down 0.6 per cent on the previous quarter. The contraction came at a faster rate than previously thought, and was down from last month’s initial estimate of a 0.5 per cent contraction.

It was the first quarter since April-June 1992 in which UK economic activity has contracted and confirms that the UK economy is almost certainly in recession — although this will not be official until figures for the final quarter of 2008 are published next year. The technical definition of a recession is two quarters of negative growth.

It was also the worst single quarter for the economy since the last three months of 1990 — the period in which former Conservative Prime Minister Margaret Thatcher was toppled from power.

Much of the reduction in activity was due to a sharp slowdown in production, which fell by 1.4 per cent, while manufacturing output which fell by 1.6 per cent — its worst fall since the last three months of 2001.

UK manufacturing is already technically in recession and the ONS said there were “significant” falls in the manufacture of electrical equipment, transport equipment and paper, printing and publishing. It said the output of the mining and quarrying sector also fell by 1.1 per cent in the period.

However, output in the services sector — which now makes up four-fifths of the economy — also shrank by 0.5 per cent, its worst fall since July-September 1990. The ONS said there was significantly weaker growth in a number of the main service industries, in particular distribution and business services.

Household spending during the three months was down 0.2 per cent on the April-June quarter, making it the second consecutive quarter in which households have spent less, the first time this has happened since 1995.

Howard Archer, chief UK and European economist at consultancy IHS Global Insight, said: “While the revised data still do not show the UK technically into recession yet, we are entering into it big time in the fourth quarter. Indeed, GDP looks like contracting by around 1.0 per cent in the fourth quarter as the heightened financial crisis increasingly feeds through to hit an already seriously damaged economy. We now expect the economy to decline through 2009, resulting in overall contraction of 2.4 per cent next year. Recovery is then expected to develop only very gradually in 2010, resulting in GDP growth of just 0.2 per cent.

“Consumer spending is being increasingly pressurised by now rapidly accelerating unemployment, muted income growth, very tight lending practices, heightened debt levels, a depressed housing market and substantially lower equity prices.

“Additionally, heightened concerns about the economic outlook and jobs will lead consumers to tighten their belts. These factors seem certain to outweigh the support to consumer spending coming from lower interest rates, the VAT cut and increased discounting on the high street.

“Meanwhile, business investment will decline significantly further in 2009 in the face of sharply weaker final demand, increasing spare capacity, worsening cash flows, depressed business confidence, very tight credit conditions and deteriorating profitability.”

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