Recession knocks at door as British economy shrinks

London: The British economy shrank 0.5 per cent in the third quarter of 2008, much worse than expected and the first contraction in 16 years, official data showed on Friday, making a recession all but inevitable.

With the global financial crisis feeding through to the real economy with ever more impact, economists are agreed that the current quarter is likely to prove as bad if not worse for Europe's second-largest economy, confirming a recession.

At one point, the pound fell to its lowest against the dollar in six years and the FTSE 100 index of leading shares dropped nearly 8 per cent as the first reading of third quarter GDP from the Group of Seven industrialised nations rattled investor confidence.

Futures markets moved to price in a higher chance the Bank of England would cut interest rates by another 50 basis points in Nov-ember, following this month's emergency cut to 4.5 per cent from 5 per cent, the biggest reduction in seven years.

The 0.5 per cent quarterly drop in gross domestic product was the biggest since the last three months of 1990 and the first contraction since the second quarter of 1992, the Office for National Statistics said.

The UK economy stagnated with zero growth in the second quarter - and if this is revised down when government statisticians next review the figures in December, then the start of the recession could be backdated to April.

Expectations

"It's a very emphatic entry into recession which underlines the need for dramatic rate cuts - which we think the Bank of England will deliver," said Brian Hilliard, economist at Societe Generale.

"We're looking for a 50 basis point cut in November and a rapid succession of cuts to about 2.5 per cent by the middle of next year."

Expectations of those further rate cuts coupled with the weak growth helped drive the pound down sharply. It has lost nearly 20 per cent against the dollar in the last month, to stand around $1.55 (Dh5.68) after trading above $2 for much of last year. BoE Deputy Governor Charles Bean said things could get worse for the economy. "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history," Bean told the Scarborough Evening News. "In terms of impact on the real economy we are still early days."

Speaking before the GDP figures came out, fellow BoE policymaker Andrew Sentance said the risks of a severe downturn had increased, backing the governor of the bank, Mervyn King, who has said a recession is now on the cards.

Prime Minister Gordon Brown, who for a long time boasted of ending boom and bust, also admitted on Wednesday Britain was likely to fall into recession - normally defined as two successive quarters of economic contraction.