(RTTNews) - The British economy failed to exit recession in the third quarter, thereby leading itself to the longest streak of contraction on record. Disappointing GDP figures would possibly force the central bank to extend its quantitative easing measures next month.

The economy contracted 0.4% sequentially in the third quarter, after shrinking 0.6% in the second quarter, a preliminary estimate from the Office for National Statistics showed Friday. Economists had expected the economy to exit recession in the third quarter by expanding 0.2%.

The decline in the third quarter was the fifth consecutive quarter of steep contraction, following a small fall in the second quarter of 2008, the ONS said. This continuous decline in gross domestic product was the longest period of fall since the records began in 1955. Among major economies, Japan, Germany and France moved out of recession in the second quarter itself.

The sequential decline in output was due to decreases in all component aggregate series. Output of the service industries slipped 0.2% and output in the production industries dropped 0.7%, following a 0.5% fall in the prior quarter.

Manufacturing was down 0.2%, while declines in extraction and electricity, gas and water supply was 3.5% and 0.6%, respectively. Meanwhile, construction output slipped 1.1% versus 0.8% decrease in the prior quarter.

Year-on-year, gross domestic product was down 5.2% in the third quarter, larger than the expected fall of 4.6%. GDP declined 5.5% in the second quarter, which was the biggest since records began in 1955.

Commenting on the latest GDP data, ING economist James Knightley said, “This is a major surprise largely from the fact that the purchasing managers’ indices have historically been excellent lead indicators for GDP and had been pointing to robust growth.” The economist noted that no revised data will be released ahead of the next Bank of England rate-setting session. “This clearly suggests that the likelihood of an expansion in QE by GBP 50 billion or so over the next quarter is rising, although is not a forgone conclusion.”

The British Chambers of Commerce found the GDP data deeply disappointing. Chief Economist, David Kern said, “The figures strongly support our assessment that the MPC must increase the stimulus provided by Quantitative Easing, and must take action to boost bank lending.” The lobby urged government to act more forcefully to remove the obstacles hampering the productive capacity of the economy.

TUC General Secretary Brendan Barber warned, “Any halt in economic stimulus - or even worse, cuts in spending in a premature effort to close the deficit - could easily send us into another downwards spiral.”

Caroline Newhouse-Cohen, an economist at BNP Paribas expects overall GDP to contract by around 5% for the year, the sharpest drop since 1955. GDP data were disappointing, as a slight upturn in the third quarter was expected, though they confirm that the worst of the recession is behind us, said the economist.

Earlier this month, BoE policy makers had unanimously decided to hold the interest rate at a record low and to continue the asset purchase programme totaling GBP 175 billion using central bank reserves. The MPC will decide whether to extend the asset purchase scheme when it meets on November 5. The next quarterly Inflation Report of the central bank is due on November 11.

Earlier in the week, MPC member Adam Posen said he favors an extension of the central bank’s GBP 175 billion asset purchase scheme. Also this week, deputy governor Paul Tucker said that if it was deemed necessary to increase quantitative easing beyond the GBP 200 billion proposed under the current scheme then “it would be possible and it would happen”.

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