GDP growth in the third quarter down 0.5%

Worse than expected growth figures out today show the economy contracted 0.5% in the third quarter sending a shudder through the markets. This is the first contraction since the second quarter of 1992.

16 years of growth have ended.

Analysts were broadly expecting a fall in GDP - but one of 0.2%. 0.5% is not as bad as when the UK entered its last recession in 1990 - then collapsing by 1.2%.

The reasons for the last recession in the 90s was that inflation had started getting out of control necessitating sharp rises in interest rates to slow the economy. This time the reasons are different.

Yes inflation has been high, but inflationary pressures are rapidly dissipating. Oil prices have fallen from their peak of $146 a barrel and food prices are falling. Actual food volume sales fell in September - the first time since the 80s.

The causes of this recession are simple - growth has collapsed owing to the lack of availability of further credit. Government, businesses and consumers have embarked on a debt-fuelled binge over the past 10 years aided by readily available money. You only have to look at the amount of equity withdrawal from people's homes that has taken place over the last 5 years. People were using their houses, increasing in value seemingly every month, as cashpoints, financing a lavish lifestyle way in excess of their earnings.




Now the party is over. House prices are falling having grown to truly unaffordable levels, leaving the very real prospect of negative equity for many. Equity withdrawal is no longer an option and people up and down the country are having to face the new economic reality.

The UK is heavily reliant on the housing market - it is a totem of confidence. The first signs emerged as housebuilders and estate agents started reporting they were struggling to shift houses. That moved on to retailers who specialise on big-ticket items - often purchased when people move house.

And from there, it has spread to the financial services sector. The US started their correction in the housing market before the UK and the big banks realised that all the mortgages that they had advanced for commercial and residential property were secured against assets that were rapidly losing their value. Worried by the state of their balance sheets, and fearing banking collapse, banks stopped lending to each other, and so the credit crunch begun.

Now small businesses, reliant on flexible banking facilities to manage their cashflow, are starting to struggle as banks become ever more risk adverse. Manufacturers of everything from cars to double glazing windows are finding that consumers no longer have the money, or fear about spending their money in case they need it tomorrow, to purchase their products.

With a drop in demand, unemployment is sure to rise furthering the cycle.


The Bank of England needs to urgently and aggressively cut interest rates. By reducing the monthly cost of people's mortgages they will hopefully have more money to be able to spend their way out of the recession.

The recapitalisation of the banks will gradually ease the availability of credit although we will probably never see the availability of cheap finance that has been a hallmark of the last five years.

Government too should continue its level of public spending. This is no time to cut public expenditure - however, it should be on infrastructure projects and capital expenditure rather than wasted on operating expenditure.

Investment should take place in the technologies of the future. Clean coal, renewables and nuclear power must be part of the equation to reduce the UK's reliance on oil and gas from unstable regimes. Tax breaks for investment in these technologies need to be introduced.




Once the economy starts expanding again, public spending should be reduced. It has grown to an unsustainable level over the past 10 years. The country's debts will need to be repaid. Although it pains me to say so, tax cuts will have to wait until the country's finances are in a better state. David Cameron's plans to share the proceeds of growth urgently need revision.