U.K. Economy Shrinks

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 ration 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 next month will announce new measures to revive the flow of loans and protect workers.

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.

The downturn has already led to the failure of British retailers such as Woolworths Group Plc and MFI Group Ltd. Woolworths’ 813 U.K. stores will shut by Jan. 5, leaving 27,000 people out of work. MFI closed all of its furniture outlets this month, adding to pressure on the Labour government.

Brown has pledged 20 billion pounds ($30 billion) in tax cuts and spending to counter the recession, including a reduction in sales tax to 15 percent from 17.5 percent. He pushed up government borrowing the most since World War II in the first six months of the fiscal year.

The U.K. was hit harder by the global slowdown in the quarter than other major economies. The U.S. economy shrank 0.1 percent, Japan contracted 0.5 percent, and economic output in the 15-member euro area fell 0.2 percent.

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.

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.

The U.K.’s 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.

U.K. Economy Shrinks

TradingEconomics.com, Bloomberg.com
12/23/2008 7:24:46 AM