Britain appeared to be edging closer to recession on Tuesday as a leading economics institute said that the economy was shrinking.

GDP fell by 0.2 per cent in the three months to August after a 0.1 per cent fall in the three months to July, according to calculations by the National Institute of Economic and Social Research (NIESR).

The institute expects another 0.2 per cent fall between July and the end of September, leading to the first full quarter of economic contraction since 1992. A recession is defined as two consecutive quarters of shrinking output. The first official figures showing economic activity in the third quarter will not be published until next month.

Dismal manufacturing news added to the gloomy outlook. Official figures showed that manufacturing output fell for the fifth month in a row in July, shrinking by 0.2 per cent. Even the boost to exports from the weakening pound was not enough to outweigh a slide in global demand, analysts said.

Manufacturing output in the three months to July was 1.3 per cent lower than the same period a year earlier. The wider measure of industrial production, which includes mining, quarrying and energy, dropped by 0.4 per cent in July.

Howard Archer, of Global Insight, the economic consultancy, said: “These figures reinforce the belief that the economy will contract in the third quarter and is well on its way into recession.”

Yet there were hopes that yesterday's figures, coupled with last month's fall in producer prices suggesting that inflation may have peaked, could leave the way open for interest rates to be cut this year. Any cut in rates would be welcomed by homeowners, as more evidence emerged of the deterioration in the housing market. Estate agents said that sales had halved in the past year, with the average company selling one house a week between June and the end of August. This is the lowest number of transactions for 30 years, figures from the Royal Institution of Chartered Surveyors (RICS) show.

The number of first-time buyers taking out a home loan also fell to a record low in July. Only 17,300 new borrowers took out a mortgage during the month, 48 per cent fewer than in July last year, figures from the Council of Mortgage Lenders show.

Borrowers, especially first-time buyers, have struggled to clinch a mortgage deal in the wake of the credit crunch as lenders demand hefty deposits. The average deposit paid by a first-time buyer rose to 15 per cent in July, up from 10 per cent in July last year. This is the highest level since the early 1980s, the CML said.

The lack of buyers has dragged down house prices as sellers cut their prices to secure a sale. The average house price fell by 12.7 per cent in the year to August, figures from Halifax show.

RICS also said that the market had stalled in recent months as buyers waited for the Government's announcement on stamp duty, which was delivered last week. Alistair Darling said that the 1 per cent stamp duty charge for properties worth between £125,000 and £175,000 would be scrapped for a year, ending months of speculation.

Nevertheless, surveyors remain gloomy about the housing market, with 8 per cent more expecting sales to fall rather than rise in the coming months. In July a balance of 5 per cent expected sales to fall.

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