UK economy shrinks severely

London: The UK economy shrank more than expected in the third quarter as service industries including financial companies, hotels and restaurants recorded the biggest decline since 1990.

Gross domestic product contracted 0.6 per cent from the second quarter, the most in almost 18 years, the Office for National Statistics said in London yesterday. The drop was bigger than the previous estimate for a 0.5 per cent slump, which economists had expected would be confirmed.

Bank of England policy makers have slashed their benchmark interest rate to the lowest level since 1951 and may cut again next month as the economy sinks deeper into recession. Prime Minister Gordon Brown's government plans to announce new measures to revive lending and protect workers early next year.

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

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

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

Manufacturing production fell by 1.6 per cent 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 per cent.

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

Pressure on Brown

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.

Institutions granted 17,773 mortgages in November, down 61 per cent from the same month a year ago, according to the British Bankers' Association. Brown already has pledged a £20-billion fiscal boost and £50 billion to recapitalise banks. He will announce more measures in January.

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

The central bank also has a £200 billion Special Liquidity Scheme to help banks, and the Treasury has offered institutions £250 billion 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 per cent over the past two months. Deputy Governor John Gieve told the BBC yesterday that the bank failed to predict the severity of the downturn.

"There's further negative news to come," said George Buckley, chief UK econ-omist 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 US 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 per cent 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 UK stores will close by January 5 unless a buyer is found, adding up to 27,000 workers to the jobless roles.