The 1.9% fall in GDP in the first quarter represents the largest quarterly drop since a strike-related 2.4% plunge in the third quarter of 1979. GDP has now declined 4.1% from its peak in the first quarter of 2008, which compares with peak-to-trough falls of 2.5% in the 1990-91 recession, 3.3% over 1973-75 and 5.9% in the 1979-81 slump.

The chart shows the current fall in GDP together with Treasury and Bank of England forecasts and the 1979-81 decline, rebased to the peak in the first quarter of last year. The first-quarter result was 0.8% lower than implied by the central projection in the Bank’s February Inflation Report. The MPC judged that the latest indicators were broadly consistent with this forecast at its April meeting so today’s number could boost the chances of an expansion of QE.

The Treasury’s Budget forecast implied that GDP would fall by 2.2% between the fourth quarter of 2008 and the second half of 2009. This looked hopeful even before today's news of a 1.9% first-quarter loss. A monthly GDP estimate derived from data on industrial and services output was 0.4% below its first-quarter average in March, suggesting a further fall of at least this amount in the second quarter.

The Treasury projects a recovery in GDP of 2.9% per annum between the second halves of 2009 and 2011. While widely derided, this is lower than the 3.3% pa increase over the same period forecast in the Bank of England’s February Inflation Report. A key issue is whether the Bank will retain this steep recovery profile, albeit from a lower base, in its next Report, released on 13 May.

The 1.9% first-quarter decline is difficult to reconcile with available expenditure data. With retail sales rising by 1.0% in the first quarter, overall consumer spending seems unlikely to show a decline larger than the 1.0% recorded in the fourth quarter. Trade figures for January and February signal little impact from net exports. Meanwhile, output of “government and other services” rose in the first quarter, suggesting higher general government consumption. The implication is that GDP weakness was driven by investment and stocks.

Destocking already amounted to 1.3% of GDP in the fourth quarter, based on current data. This offers a glimmer of hope – a faster cut-back in the first quarter would imply a correspondingly larger future boost to GDP when stock levels stabilise.