April 24 (Bloomberg) -- The U.K. economy shrank more than economists forecast in the first quarter in the biggest contraction since Margaret Thatcher came to power in 1979.
Gross domestic product fell 1.9 percent from the final three months of 2008 as manufacturing and business services posted record declines, the Office for National Statistics said today in London. Economists predicted 1.5 percent, the median of 29 forecasts in a Bloomberg News survey showed. GDP declined 1.6 percent in the previous quarter.
Prime Minister Gordon Brown’s government this week said the deepest recession since World War II will push the budget deficit to a record, prompting Moody’s Investors Service to say its credit rating may be at risk. The Bank of England nevertheless argues the recession may be easing as they print money to stave off deflation and keep rates at a record low.
“It’s shockingly bad,” said Alan Clarke, an economist at BNP Paribas SA in London. “People still aren’t pessimistic enough. This casts shadows over any green shoots of recovery. This recession will be more prolonged than people expect.”
The pound was little changed against the euro and the dollar after the figures and traded at $1.4617 at 9:55 a.m. in London.
The U.K. is the first Group of Seven nation to report first quarter GDP data. Leaders from the G-7 meet in Washington today as unemployment, deflation and toxic bank assets still stand in the way of a rebound from the global recession.
Record Declines
U.K. business services and finances shrank 1.8 percent, the most since records for the category began in 1983. Manufacturing contracted 6.2 percent, the most since at least 1948, the statistics office said.
This is the first time GDP has contracted by more than 1 percent for two consecutive quarters since modern records began after World War II.
“Looking ahead, the best we can say is that the pace of economic decline may slow in the coming months,” said John Cridland, deputy-director general at the Confederation of British Industry. “Given that unemployment will continue rising sharply, even if businesses begin to see the rate of decline in activity starting to ease, consumers are likely to feel anxious about job prospects.”
The economy last shrank by more in the third quarter of 1979. Labour Prime Minister James Callaghan began that year by saying he wouldn’t declare a state of emergency and denying that the country had been left in chaos because of rampant strikes. Margaret Thatcher replaced him as the nation’s first female premier after the Conservative Party won the election in May.
Darling’s Measures
Brown must hold an election by June 3 next year. His ruling Labour party trails the opposition Conservatives in opinion polls, lagging by 19 percent in a BPIX poll published April 19.
Chancellor of the Exchequer Alistair Darling predicted in his April 22 budget that the economy will contract about 3.5 percent this year, and rebound with a 1.25 percent expansion in 2010. That’s at odds with the International Monetary Fund, which predicts a GDP drop of 0.4 percent next year after shrinking 4.1 percent in 2009.
Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues and the accumulation of sizeable assets and contingent liabilities as a result of successive bank bailouts,” analysts at Moody’s including Arnaud Mares in London wrote in a report yesterday. “The government is taking risks with public finances.”
Crippled
Brown has spent 1.4 trillion pounds ($2.1 trillion) bailing out British banks crippled by the crisis, pushing this year’s budget deficit to 12.4 percent of GDP, the highest of any Group of 20 nation. Darling this week offered motorists a 2,000-pound ($2,928) payment to trade in old cars for new ones to stem job losses at manufacturers. Auto sales slid 31 percent in March.
Lloyds Banking Group Plc, which has received billions of pounds of state guarantees, said yesterday it will cut 985 jobs. Michael Page International Plc, the U.K.’s second-largest recruitment company, said April 7 first-quarter profit slumped 32 percent as the pace of layoffs increased.
U.K. unemployment rose in March to the highest level since Brown’s Labour Party came to power in 1997 as the recession forced companies to cut jobs.
Retail sales still climbed 0.3 percent in March, the statistics office said in a separate report today. Economists predicted a 0.3 percent drop, according to the median of 26 forecasts in a Bloomberg News survey. Debenhams Plc, the U.K.’s second-biggest department story company, said yesterday that sales rose and profit margins increase.
Bank of England policy makers said there are signs the pace of economic contraction may be moderating, minutes of their April 9 meeting show. The bank is spending 75 billion pounds to buy bonds with newly created money after it cut the key interest rate to 0.5 percent, the lowest since it was founded in 1694.
To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.
Last Updated: April 24, 2009 05:08 EDT
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