U.K. Will Shrink Until Fourth Quarter, Niesr Says

By Svenja O’Donnell and Jennifer Ryan

Feb. 4 (Bloomberg) -- The British economy will shrink until the fourth quarter of this year as the world endures the slowest growth since the end of World War II, the National Institute of Economic and Social Research said.

Gross domestic product will fall 2.7 percent in 2009, compared with a previous forecast of a 0.9 percent contraction, Niesr, whose clients include the Treasury and the Bank of England, said in a report today. It predicts the global economy will expand 0.5 percent, the slowest pace in 60 years.

Consumer confidence dropped to the lowest level in at least four years in January and service industries from banks to airlines shrank for a ninth month, reports showed today. The central bank may cut the benchmark interest rate to a record low of 1 percent tomorrow as policy makers try to unblock credit markets and fight the economic slump.

“The economy’s still in the throes of recession,” George Johns, an economist at Barclays Capital in London, said in an interview. “There will still be a sizable contraction in the first quarter, and it will be some time before services get growing again.”

Chancellor of the Exchequer Alistair Darling has suggested that he may have to scale back his prediction of a recovery in the second half of the year. He said yesterday that major economies are facing the worst slump since the 1930s.

Five Quarters

The Niesr forecasts show Britain’s recession, which began in the three months through September, will last through the third quarter of this year. With five quarters of uninterrupted contraction, that would match the length of the recession from 1990 until 1991.

“The U.K. economy has itself entered a rather severe recession,” said Simon Kirby, an economist at Niesr. “Household consumption expenditure will be a major contributor to the contraction.”

A measure of consumer sentiment fell 8 points to 40 in January, the lowest since the survey began in 2004, Nationwide said today. A gauge of the present situation dropped to 23 last month from 29 in December, the report showed. The readings were taken from a survey of 1,000 people between Dec. 15 and Jan. 18.

Demand for staff fell at the fastest pace in more than a decade, a report by the Recruitment and Employment Confederation and KPMG showed today. A gauge of job vacancy levels dropped to 27.4 in January from 29.2 in December, falling for an eighth month, at the fastest pace since the survey began in 1997.

Services Shrink

The Chartered Institute of Purchasing and Supply’s survey of about 700 service companies showed an index reading of 42.5 in January, compared with 40.2 the previous month, the Markit research company said today. The result exceeded the 40.3 forecast in a Bloomberg News survey of 29 economists. Readings below 50 indicate contraction.

The Bank of England cut its interest rate to 1.5 percent last month in a bid to kick-start the economy, its lowest level since the bank was created in 1694. Policy makers will trim the rate by a half-point at their meeting tomorrow, according to the median forecast of 61 economists surveyed by Bloomberg.

Darling has also given the Bank of England authority to manage a 50 billion-pound ($71 billion) fund to purchase bonds and commercial paper, providing policy makers with another tool to fight the recession.

“I would be inclined to do it sooner rather than later,” Niesr’s director, Martin Weale, told journalists at a briefing yesterday. “I don’t see any reason why conventional interest changes should be preferred over this sort of policy.”

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.