• GDP down 0.8% in threee months to June
• City had expected a 0.3% decline, with some expecting growth

The chancellor’s forecasts for economic growth were blown out of the water official figures revealed Britain’s economy contracted by a record 5.6% over the last year as output fell for a fifth straight quarter.

Dashing hopes that the steepest decline in growth since the 1930s might be nearing an end, the Office for National Statistics said gross domestic product – the total value of goods and services in the economy – fell by 0.8% in the three months to June. The size of the drop surprised the City, which had expected only a 0.3% decline following recent signs of a pickup in the housing market and strong growth in high street spending.

But although the news caused the pound to fall 0.5% against the dollar to $1.64, the FTSE 100 saw its 10th straight day of gains, ending up 16.8 points, or 0.4%, at 4,577.

Economists believe GDP will almost certainly contract by more than the Treasury’s forecast of between –3.25% and –3.75% this year.

“It would be a miracle [if the government's target was met],” said Colin Ellis, European economist at Daiwa Securities SMBC. “Not on the scale of water into wine but not far off.”

The economy has already contracted by 3.16% this year and analysts are predicting a drop of 4.5% for 2009 as a whole.

Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said the economy would have to grow by 1% in the third quarter of the year and by 1.8% in the final three months to meet the government’s target of –3.75%.

The Liberal Democrat Treasury spokesman, Vince Cable, said: “These figures blow a hole in the chancellor’s GDP forecast for this year. The government’s failure to address the crisis in bank lending is only making the economic outlook worse. As a result, the deficit will balloon further, leading to bigger spending cuts or higher taxes.” The shadow chancellor, George Osborne, said: “These disappointing figures are much worse than expected and show that the recession is longer and deeper than the government had led us to believe. The sad news is this will mean the rise in unemployment is likely to be even steeper.”

Before yesterday’s data, some economists had even predicted the UK could post its first positive growth since early 2008, and the size of the decline prompted immediate speculation that the Bank of England would be forced into fresh emergency action to kickstart activity.

While the pace of decline in GDP slowed from the 2.4% seen in the first three months of 2009, the economy has suffered a cumulative contraction of 5.7% in the last five quarters.

The ONS said this was double the drop in the recession of the early 1990s and almost as big as the 6.4% retrenchment during the 1980-81 slump. The 5.6% drop in GDP in a year has not been matched since comparable records began in 1955.

Business services and finances, a sector that has boomed for much of the last decade, accounted for more than a quarter of the GDP decline in the second quarter. Overall, services fell by 0.6% on the quarter and by 3.8% on the year.

Describing the figures as “shockingly bad” Vicky Redwood, UK economist at Capital Economics, said they “firmly dash any hopes that the UK had already pulled out of recession”. Getting the economy back on track “looks likely to be a long hard slog”, she said.

The TUC’s general secretary, Brendan Barber, said: “There are no green shoots here. Unemployment is growing and a recovery that brings hope to the jobless looks ever more distant.

“Immediate big spending cuts are the last thing we need. They could tip the economy into an ever deeper downturn and make the deficit worse when the tax take falls and spending on unemployment goes up.”

Meanwhile, US consumer confidence fell this month to its lowest level since April amid growing pessimism about the long-term economic outlook, especially about income and jobs.