U.K. Economy Shrinks Most Since 1980, in Recession

By Jennifer Ryan

Jan. 23 (Bloomberg) -- The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said that the government is using “every weapon at our disposal” to fight the crisis. Bank of England Governor Mervyn King says officials may start buying up securities soon as interest rates lose their potency to aid the economy.

“This is undeniably grim,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues.”

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.

‘Not for Turning’

The last time the economy shrank so fast in a three-month period was in 1980. That October, Prime Minister Margaret Thatcher responded to criticisms of a U-turn on the economy and her handling of labor unions by declaring that “the lady’s not for turning.” The next month, Ronald Reagan defeated Jimmy Carter in a landslide U.S. presidential election.

“We are building the foundation stones of a recovery plan,” Brown said on BBC Radio 4 today. “You need coordinated international action to deal with the global banking problems.”

Six polls published this year show Brown’s Labour Party trailing further behind David Cameron’s Conservatives. Brown pledged Jan. 19 to extend the bank rescue announced last year and boost the government’s stake in Royal Bank of Scotland Group Plc to 70 percent. RBS may post an annual loss of 28 billion pounds ($39 billion), the biggest in British corporate history.

Conservative View

“What is completely lacking is public confidence in policy and international confidence,” George Osborne, a Conservative lawmaker who speaks on finance, told Sky News. “They are not commanding confidence and sadly that is what is lacking.”

The FTSE 100 index dropped below 4,000 to a two-month low. The pound fell as low as $1.3506 and traded at $1.3605 as of 1:02 p.m. in London. The currency’s slide to a 23-year low against the dollar this week signals investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co. strategists wrote in a report yesterday.

“The pound sterling is going to be under pressure,” Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television. “The U.K. hasn’t got much to sell to the world anymore.”

The European Commission forecasts the British economy may contract 2.8 percent this year, the most since 1946 when the country was in the grip of mass demobilization after World War II. U.K. GDP rose 0.7 percent in 2008, the least since 1992, officials said today.

Darling’s Forecast

Chancellor of the Exchequer Alistair Darling today told broadcasters that the GDP reading was “undoubtedly sharper than many people expected” and suggested it may force him to scale back predictions of a recovery in 2009. In November he forecast the economy would shrink as much as 1.25 percent this year.

“A pronounced contraction in spending and output is under way,” King said on Jan. 20. “In the first half of this year, the rate of contraction is likely to continue to be marked.”

U.K. manufacturing confidence fell to the lowest since 1980 in the past quarter, a survey by the Confederation of British Industry showed yesterday. TT Electronics Plc, the U.K. maker of car sensors for Bayerische Motoren Werke AG, said Jan. 21 it will cut 700 jobs to weather the automobile industry slump.

“At the moment, I would expect things to continue getting worse rather than better,” British Airways Plc Chief Executive Office Willie Walsh said in a speech today in India.

Rate Cuts

King, who has overseen cuts in the benchmark interest rate to 1.5 percent, the lowest since the bank was founded in 1694, is also planning alternative means to stimulate the economy. He said this week that officials may start buying corporate bonds and commercial paper within weeks to help the economy.

“The slowdown is much sharper than expected,” Lena Komileva, head of G-7 market economics at Tullett Prebon in London, said on Bloomberg Television. “The risk is that the right policy is not being administered quickly enough. The economy is falling off a cliff.”

Retail sales increased 1.6 percent on the month on a seasonally adjusted basis, the statistics office said. Officials said that the data should be treated with caution as they reassess their method of accounting for seasonal swings. They advised people to focus on the unadjusted data, which showed a 1.8 percent increase in December from a year earlier.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net