U.K. Economy Shrinks Most Since 1990 in Third Quarter

By Svenja O’Donnell

Dec. 23 (Bloomberg) -- The U.K. economy shrank the most since 1990 in the third quarter and mortgage lending dropped to the lowest in 14 years as tightening credit exacerbated the slide into recession.

Gross domestic product contracted 0.6 percent from the second quarter, the Office for National Statistics said in London today. The drop was bigger than the previous estimate of 0.5 percent, which economists had expected would be confirmed. Home-loan approvals plunged 61 percent to 17,773 in November from a year earlier, the British Bankers’ Association said.

The Bank of England and Prime Minister Gordon Brown are struggling to shore up the economy as banks keep a grip on lending and global trade slumps. The central bank has already cut its benchmark interest rate to 2 percent, the lowest since 1951, and may move again next month. Brown meanwhile is planning new measures to revive the flow of credit and protect workers.

“It’s going to get worse before it gets better,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc. “The weakness is very broad based. We think interest rates are going to go all the way close to zero.”

The pound, which has lost almost a quarter of its value against the currencies of the U.K.’s biggest trade partners this year, was little changed after the figures. It was at 94.402 pence per euro and traded at $1.4795 against the dollar.

From a year ago, the economy grew 0.3 percent, the same pace as estimated a month ago. Last year’s growth of 3 percent for the whole of 2007 was the strongest since 2000.

Services Decline

An index of service industries dropped 0.2 percent in the quarter through October. That compares with a decline of 0.5 percent in the three months finishing in September, the biggest since the third quarter of 1990.

Manufacturing production fell by 1.6 percent in the third quarter, the biggest decline since the fourth quarter of 2001, the statistics office said. Industrial production including mining and oil and gas output dropped 1.4 percent.

Hotels, distribution and catering, which includes retailers, fell 2.1 percent in the third quarter, the most since the third quarter of 1980. Business services and finance shrank by 0.6 percent after a 0.5 percent decline in the second quarter.

The figures add to pressure on Brown’s government to bring forward more measures helping businesses and consumers. Brown yesterday said he was “angry” at banks for triggering the financial crisis and frustrated that they’re still rationing credit after tapping the government for extra funds.

Lending Rationed

Brown already has pledged a 20-billion ($29.5 billion) pound fiscal boost and 50 billion pounds to recapitalize banks. He will announce more measures in January.

The current account deficit swelled to 7.7 billion pounds ($11.4 billion) in the third quarter from 6.4 billion pounds in the three months through June. The previous figure was revised lower from 11 billion pounds because of new information about foreign investment flows, the statistics office said.

The central bank also has a 200 billion-pound Special Liquidity Scheme to help banks, and the Treasury has offered institutions 250 billion pounds in additional credit.

Bank of England policy makers have suggested they’re prepared to reduce borrowing costs further after cutting the key rate by 2.5 percentage points to 2 percent over the past two months. Deputy Governor John Gieve told the BBC yesterday that the bank failed to predict the severity of the downturn.

Fed’s Action

“There’s further negative news to come,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “We are going to see negative GDP numbers for most if not all of 2009. We expect the bank to cut rates to 0.5 percent by the end of the first quarter.”

The U.S. Federal Reserve last week lowered its rate close to zero. The European Central Bank has cut its key interest rate by 1.75 percentage points to 2.5 percent since early October, and investors expect another reduction in January, Eonia forward contracts show.

In Britain, companies including Woolworths Group Plc and MFI Retail Ltd. have fired staff and entered bankruptcy administration in the past month. Woolworths’s U.K. stores will close by Jan. 5 unless a buyer is found, adding up to 27,000 workers to the jobless roles.

Unemployment rose at the fastest pace since 1991 in November, the Office for National Statistics said Dec. 17. The number of people receiving jobless benefits rose 75,700 to 1.07 million, the highest level since July 2000.

Britain’s housing slump is also deepening, with Hometrack Ltd yesterday predicting home values may fall a further 10 percent next year.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.