By Jennifer Ryan
Oct. 24 (Bloomberg) -- The U.K. economy shrank more than forecast in the third quarter as the financial crisis ravaged industries from banking to construction, evidence that Britain is in the grips of its first recession since 1991.
Gross domestic product dropped 0.5 percent from the second quarter, the first contraction in 16 years, the Office for National Statistics said today in London. Economists predicted a 0.2 percent decline, according to the median of 35 forecasts in a Bloomberg News survey. Growth stalled in the prior three months.
The pound had the biggest intraday drop against the dollar in at least 37 years as the report confirmed Prime Minister Gordon Brown's prediction this week that a recession is likely. His government's 500 billion-pound ($805 billion) bank rescue and the Bank of England's half-point rate cut this month, the biggest since 2001, may have come too late to prevent further contraction.
``It's pretty bleak and it looks ever more likely that we're going to have a recession that resembles what we saw in the early 1990s,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``We'll see another half point cut at the bank's next meeting, if not sooner.''
The pound fell as much as 2.5 percent against the dollar after the report and traded at $1.5518 as of 12:40 p.m. in London. The FTSE 100 benchmark stock index fell as much as 9.11 percent today to touch a low of 3715.24.
IMF Forecast
The U.K. is the first of the Group of Seven nations to announce GDP figures for the third quarter. The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982 as the U.S. falters, and global growth will be 3 percent, on the cusp of the group's informal definition of a world recession.
``We are determined to do everything we can and as soon as we can to help people,'' Chancellor of the Exchequer Alistair Darling told Sky News today. ``We've got to work together. the credit crunch is global.''
Today's data prompted economists at BNP Paribas to predict a full percentage-point interest-rate reduction from the current 4.5 percent at the Nov. 6 decision, followed by a half-point cut in December. Bank of America Corp and JPMorgan Chase & Co. forecast a 0.75 percentage-point cut for next month. The bank hasn't cut by more than half a point since it started setting rates in 1997.
Service industries, accounting for 75 percent of the economy, shrank 0.4 percent in the quarter, the first contraction since 1992, the statistics office said. Business services and finance output dropped 0.4 percent, the first decline since 2002.
Bank Rescue
The U.K. government announced plans to buy stakes in Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc in a rescue this month after money market tensions undermined investor confidence in banks around the world.
Manufacturing production dropped 1 percent and construction slipped 0.8 percent as both areas of the economy fell into a recession, the statistics office said. Together they make up about 20 percent of gross domestic product.
Manganese Bronze Holdings Plc, the biggest maker of London's iconic black cabs, fell the most in at least 19 years on Oct. 22 after the global financial crisis and economic slowdown sent taxi sales plunging. Travis Perkins Plc, the U.K. building materials distributor that owns the Wickes home-improvement chain, dropped the most in 19 years on Oct. 16 after saying it plans to scrap its dividend to hoard cash.
Europe's services and manufacturing industries contracted the most since 1998 in October as the crisis squeezed exports and consumer spending, according to a survey of purchasing managers released today.
Recession Forecast
Bank of England Governor Mervyn King said Oct. 22 economic news has ``probably been the worst in such a short period for a very considerable time,'' and that ``it now seems likely that the U.K. economy is entering a recession.'' He said policy makers will act ``promptly'' to keep inflation from slowing too much.
The governor's remarks came after the Bank of England joined the European Central Bank, the U.S. Federal Reserve, and counterparts around the world in a coordinated half-point rate cut on Oct. 8 to stem the financial crisis.
Lenders worldwide have had $660 billion of writedowns and losses from a credit freeze that a succession of government rescue plans has yet to unlock. U.S. lawmakers are considering a second fiscal stimulus and Italy, Germany and France are looking at tax breaks to shield their economies from the crisis fallout.
Brown gained popular support at the expense of the Conservative opposition after he announced the bank rescue plan. His Labour Party rose 6 points to 30 percent among those certain to vote, while the Conservative Party fell 7 points to 45 percent, according to an Ipsos MORI Ltd. poll released this week.
`Defining Moment'
Today's report ``is a defining moment in the record of Gordon Brown,'' said George Osborne, the Conservative spokesman on Treasury affairs. ``The day that we can all see that the central claims he made over 10 years, that he had abolished boom and bust and therefore didn't need to set aside money for a rainy day has been shown to be completely false.''
Brown said two days ago that officials must ``take action on the global financial recession'' to protect the U.K. economy. Unemployment has already risen at the fastest place in 17 years, and economists including Michael Saunders at Citigroup Inc. say more job losses will follow.
``We expect we are now in a recession,'' Nick Bate, an economist at Merrill Lynch & Co. in London and a former U.K. Treasury official, told Bloomberg Television. ``Momentum is on a strong downward path. We're looking to the second half of 2009 before we start to recover.''
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
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