Consumer spending falls in third quarter

Consumers tightened their belts in the third quarter, with consumption seeing the biggest drop since late 1995.

The 0.2 per cent fall in spending between July and September follows a 0.1 per cent decrease in the quarter to June, data from the Office for National Statistics showed.

The figures come two days after Alistair Darling, chancellor, unveiled a £20bn ($31bn) fiscal stimulus, which cut VAT by 2.5 per cent to 15 per cent to encourage shoppers to spend more money.

Gross domestic product fell by 0.5 per cent in the third quarter, confirming the initial “flash” estimate a few weeks ago. The fuller data released on Wednesday showed that most of the contraction came from a 2.4 per cent drop in business investment, especially in housebuilding.

“The big driver was housing investment,” economists at Goldman Sachs said, who concluded that residential investment alone fell by over 10 per cent on the previous quarter and by more than 20 per cent over the year.

“Residential investment – recorded when houses are completed, not started – will get worse before it gets better,” Goldman Sachs said.

It was now clear that only government spending was contributing to growth, according to Hetal Mehta at the Ernst & Young Item Club, which provides economic forecasts.

“Despite weaker sterling, exports fell 0.3 per cent in the third quarter and imports were up 0.1 per cent,” Ms Mehta said. “As a result, net exports made a negative contribution to growth – a contrast to the second quarter where it was a positive contribution from net exports that prevented GDP from falling.”

When stripped of the effects of recent high inflation GDP growth was so weak that it raised the spectre of deflation, said Michael Saunders, economist at Citi.