Economy shrinks in third quarter

LONDON (Reuters) - The economy shrank 0.5 percent 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 percent as the first reading of Q3 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 November, following this month’s emergency cut to 4.5 percent from 5 percent, the biggest reduction in seven years.

The 0.5 percent drop in gross domestic product in the three months to September 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.

“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.

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“We’re looking for a 50 basis point cut in November and a rapid succession of cuts to about 2.5 percent 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 percent against the dollar in the last month, to stand around $1.55 after trading above $2 for much of last year.


Bank 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 Bank 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 -- as all major economies were suffering because of the global financial crisis.

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Chancellor Alistair Darling said Britain would get through the current difficult time.

“It’s inconceivable, given what happened in the global credit crunch or the energy prices which are putting up costs right across the world, that countries are going to be somehow exempted from this,” he said.

On the year, the value of goods and services in the economy was 0.3 percent higher, the weakest rate of GDP growth since the second quarter of 1992, the data showed.

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All sectors of the economy posted declines on the quarter apart from agriculture, which makes up 1 percent of GDP, and government, which makes up about 23 percent of GDP.

Fourth quarter GDP data could turn out to be even worse given the fact that the escalation in the financial crisis only took hold in September in the week to Oct 18.

The John Lewis Partnership reported sales at its bellwether department stores fell 7.6 percent on the year

“News since the end of September has hardly been encouraging and the UK may well experience a recession than is significantly deeper than we had expected before,” said Philip Shaw, chief economist at Investec.

Additional reporting by David Clarke, Adrian Croft, Luke Baker and Golnar Motevalli, Editing by Swaha Pattanaik and Andy Bruce