The shocking 1.5% GDP fall in the fourth quarter reflects a collapse in output in November and December. The chart shows quarterly GDP rebased to the peak in the second quarter of 2008 together with a monthly estimate derived from data on industrial and services production. Monthly GDP was little changed between September and October but plunged 1.7% in November and a further 0.7% in December. (The Office for National Statistics currently has little information on activity in December so the latter figure could be revised significantly.) The December reading was 1.0% below the fourth-quarter average, implying a large negative carry-over into the first quarter. Monthly GDP has fallen 3.6% from a peak reached in April last year.

Retail sales figures also released today show a 0.6% rise between the third and fourth quarters. With retail spending accounting for about 20% of GDP, this suggests that other components of demand – non-retail consumer spending, government consumption, investment, stockbuilding and net exports – subtracted 1.6 percentage points from economy-wide output in the fourth quarter. In other words, GDP excluding high-street spending fell about 2%.

The severe corporate liquidity squeeze is likely to have resulted in a major decline in business investment and stockbuilding. Housing investment and consumer spending on cars should also have made significant negative contributions while even government expenditure may have fallen – output of “government and other services” was down 0.5% from the third quarter. Trade figures for October and November suggest net exports of goods had little impact, despite sterling’s plunge.

As previously noted, monetary weakness in late 2008 implies continuing economic contraction during the first half but prospects for later in the year will depend on money and credit trends in early 2009. Fed-style operations to bypass the banking system and supply cash and credit directly to companies, financial institutions and households offer the best hope of avoiding a prolonged recession. The new Bank of England asset purchase facility is a promising first step – the MPC should push for rapid implementation and expansion of the programme.