Tuesday December 23, 11:41 AM
British economy shrinks sharply in third quarter
By Roland Jackson
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LONDON (AFP) - Britain's economy, hammered by the global financial crisis, shrank more sharply than previously thought in the third quarter, official data showed on Tuesday which placed it closer to a recession.
The economy contracted by 0.6 percent in the three months to September compared with output in the previous quarter, the Office for National Statistics said in a statement giving the third and final estimates.
That was the steepest quarterly drop since 1990 and comes as Britain feels the chill from an accelerating global economic downturn.
Market expectations had been for no change from the prior reading of a 0.5-percent contraction that was given in November.
News of weakening growth sent the British pound sliding under 1.06 euros, nearing a record low of 1.0463 that was hit last week, as dealers bet on more interest rate cuts from the Bank of England.
Falling interest rates weigh on currencies because they make them a less attractive investment.
The British economy had already screeched to a halt in the second quarter to record zero growth, the ONS also confirmed on Tuesday. Stagnation in Q2 ended a run of 63 successive quarters of economic growth which stretched back to 1992.
"Contraction of 0.6 percent in the third quarter was even sharper than previously anticipated, highlighting the serious downturn in the economy," said economist Howard Archer at the IHS Global Insight concultancy.
"However, GDP was unrevised at unchanged in the second quarter, thereby keeping the UK technically out of recession for now."
The country is not officially in recession unless it reports two quarters running of negative economic growth, or contraction.
Services output, which represents almost three-quarters of the British economy, dropped by 0.5 percent in the third quarter, the ONS said. That was the fastest pace of contraction for 18 years.
"There was significantly weaker growth in a number of the main service industries, in particular distribution and business services," the ONS said
Manufacturing sector output sank by 1.4 percent, which was the sharpest fall since 2001.
The ONS added Tuesday that gross domestic product (GDP) grew by just 0.3 percent during the third quarter compared with the July-September period in 2007.
The annual figure was unchanged from the previous estimate but remains at the weakest level since 1992.
Economists warn that Britain will likely enter a recession with shrinking economic growth in the fourth quarter that runs until the end of December.
"While the revised GDP data still do not show the UK technically into recession yet, we are entering into it big time in the fourth quarter," Archer warned.
Jonathan Loynes, Chief European Economist at the Capital Economics consultancy, agreed that Britain would experience negative growth in the current quarter.
"With GDP shaping up to fall by as much as one percent or more in Q4 -- providing a very weak platform for next year -- we now expect the economy to contract by around 2.5 percent in 2009," Loynes said.
The Bank (NASDAQ: TBHS - news) of England had earlier this month cut its key lending rate to the lowest level since 1951, amid mounting evidence Britain faces a deep recession.
The BoE's monetary policy committee mulled an even steeper cut when they voted 9-0 to slash interest rates earlier this month by a full percentage point to 2.0 percent, according to minutes of their meeting.
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