A sudden collapse in the building sector caused the British economy to fall into an even steeper decline in the final quarter of last year, according to revised government figures published today.

New data showed a shrinkage of 1.6 per cent in gross domestic product (GDP) during the final three months of 2008 compared with earlier estimates of a 1.5 per cent decline.

The fall in GDP is the sharpest quarter-on-quarter decline since 1980.

On an annual basis, GDP fell by 2 per cent, more than the 1.9 per cent previously estimated, and the steepest year-on-year fall since 1991 - the last time Britain was in recession.

The sharpest decline was in the construction sector, which has been dogged by the slump in demand for new houses.

Output in construction plunged by 4.9 per cent during the final quarter compared with an earlier estimate of 1.1 per cent, while the slowdown in manufacturing accelerated to 4.5 per cent compared with the 1.8 per cent fall in the previous quarter.

Meanwhile, household spending came under the cosh from strained budgets but the state enlarged its share of the economy, spending more as households reined in.

Consumer expenditure was down 1 per cent during the period but government expenditure rose by 1.3 per cent and at the end of last year was 4.4 per cent higher than the same period in 2007.

In January, figures confirmed that the UK was officially in recession after the ONS data revealed that GDP had shrunk during two consecutive quarters - the technical definition of a recession.

Last week, the International Monetary Policy (IMF) stamped out hopes the UK economy would begin to see some recovery by Christmas with predictions that the recession will continue into 2010.

The IMF forecasts that UK GDP will plunge by 3.8 per cent in 2009, far worse that initial expectations of a 2.8 per cent contraction and will shrink by a further 0.2 per cent next year.

The forecast contrasts with Spencer Dale, chief economist at the Bank of England, who said today that "economic conditions may start to improve later this year" when the "substantial" stimulus begins to take effect.

Howard Archer, chief UK and European economist at IHS Global Insight, said consumer spending will come under more pressure from rising unemployment, which is running at 2.03 million and is expected to hit 3.3 million by the end of 2010, as well as reduced income growth.

Earlier this week, the Retail Price Index measure of inflation, which is used as a benchmark for wage deals by employers across the country, fell to 0 per cent and is widely expected to fall into negative territory this year.

He added: "Business investment is being slashed in the face of sharply weakened final demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession."

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