Wednesday January 21, 03:22 PM
British economy weakens sharply as recession looms
By Ben Perry
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LONDON (AFP) - Britain's economy is weakening fast, official data showed on Wednesday, with more figures due this week expected to confirm the country has sunk into recession for the first time since 1991.
The unemployment rate jumped to a decade-high 6.1 percent in the three months to November, with nearly two million out of work.
At the same time, the Office for National Statistics said Britain's public finances worsened last month to show a record deficit of 44.2 billion pounds (48 billion euros, 61 billion dollars) after the state bailout of Royal Bank of Scotland (LSE: RBS.L - news) .
"Another dire day for the UK economy with data ... showing unemployment soaring, the public finances deteriorating sharply," IHS Global Insight analyst Howard Archer said on Wednesday.
The fact that Britain is in recession is set to be confirmed on Friday when data is expected to show the economy contracted for a second straight quarter in the final three months of 2008.
The generally used technical definition of a recession is two quarters running of negative economic growth.
In a bid to stave off a deep recession, the Bank of England (BoE) has slashed British interest rates to an all-time low of 1.5 percent.
Policymakers voted 8-1 to cut borrowing costs earlier this month by half a percentage point to the lowest level since the central bank's formation in 1694, minutes of their last meeting showed on Wednesday.
In its minutes, the central bank said "the news on the month had left the balance of risks to output and inflation, relative to the target, to the downside."
One policymaker, David Blanchflower, voted in favour of cutting rates by 100 basis points, arguing that it was "becoming increasingly probable that there would be a deep and prolonged recession."
The BoE's main task is to keep inflation at the government-set target of 2.0 percent.
British 12-month inflation dived in December month owing to a tax cut on goods and services, falling energy prices and heavy pre-Christmas discounting, official data showed Tuesday.
The Consumer Prices Index (CPI (NYSE: CPY - news) ) annual inflation rate sank to 3.1 percent in December, the lowest level since April 2008, from 4.1 percent in November.
The Bank (NASDAQ: TBHS - news) of England is meanwhile considering increasing money supply to ensure growth at all costs does not slow so much that inflation falls below target.
BoE governor Mervyn King told businessmen late Tuesday that the bank was considering the "unconventional measures" that the government placed at its disposal as part of a new rescue package for banks unveiled this week.
He also warned economic output was expected to have fallen "sharply" in the last quarter of 2008 and predicted the contraction in the first half of this year would be "marked".
The British economy contracted by 0.6 percent in the third quarter of 2008 and the figures due Friday are expected to show it shrank 1.3 percent in the fourth quarter, according to analysts.
King stressed the priority was to get banks lending again to help cash-starved businesses and individuals, and said the new measures announced Monday would help.
The government on Monday unveiled a second multi-billion pound bank rescue package aimed at kick-starting its stalled economy but financial shares plummeted amid growing fears of deepening recession.
Press reports suggest the latest bailout is worth some 200 billion pounds.
The news came as Royal Bank of Scotland, now majority-owned by the taxpayer as a result of the credit crisis, forecast what would be the worst ever British corporate loss of up to 28 billion pounds, in part owing to its role in the costly and mis-timed takeover of Dutch lender ABN Amro (Amsterdam: AABA.AS - news) in 2007.
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