Back to the Thatcher era

Bloomberg

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The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980, as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said Friday in London. Economists predicted 1.2 percent, according to the median of 33 estimates in a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said Friday that the government is using "every weapon at our disposal" to fight the crisis and Bank of England Governor Mervyn King said officials may start buying up securities soon as interest rates lose their potency to aid the economy.

"This is undeniably grim,'' said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. "Two or three quarters more like this and you're talking about depression, not recession. This should hasten activity to address the credit and money market issues."

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.

The Thatcher-Reagan times
The last time the economy shrank so fast in a three-month period was in 1980. That October, Prime Minister Margaret Thatcher responded to criticisms of a U-turn on the economy and her handling of labor unions by declaring that "the lady's not for turning."

The next month, Ronald Reagan defeated Jimmy Carter in a landslide U.S. presidential election.

"We are building the foundation stones of a recovery plan," Brown said on BBC Radio 4 Friday. "You need coordinated international action to deal with the global banking problems."

Six polls published this year show Brown's Labour Party trailing further behind David Cameron's Conservatives. Brown pledged Jan. 19 to extend the bank rescue announced last year and boost the government's stake in Royal Bank of Scotland Group to 70 percent. RBS may post an annual loss of 28 billion pounds ($39 billion), the biggest in British corporate history.

The FTSE 100 index dropped below 4,000 to a two-month low. The pound fell as low as $1.3543 and traded at $1.3560 as of 9:48 a.m. Friday in London. The currency's slide to a 23-year low against the dollar signals investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co. strategists wrote in a report Thursday.

Grim forecasts
The European Commission forecasts the U.K. economy may contract 2.8 percent this year, the most since 1946 when Britain was in the grip of mass demobilization after World War II. The economy grew 0.7 percent in 2008, the least since 1992, officials said Friday.

"A pronounced contraction in spending and output is under way," King said on Jan. 20. "In the first half of this year, the rate of contraction is likely to continue to be marked."

U.K. manufacturing confidence fell to the lowest since 1980 in the past quarter, a survey by the Confederation of British Industry showed Thursday. TT Electronics, the maker of car sensors for Bayerische Motoren Werke, said Jan. 21 it will cut 700 jobs to weather the automobile industry slump.

King, who has overseen reductions in the benchmark rate to 1.5 percent, the lowest since the bank was founded in 1694, is also planning alternative means to stimulate the economy. He said last week that officials may start buying corporate bonds and commercial paper within weeks to help the economy. Retail sales increased 1.6 percent on the month on a seasonally adjusted basis, the statistics office said. Officials said that the data should be treated with caution as they reassess their method of accounting for seasonal swings. They advised people to focus on the unadjusted data, which showed a 1.8 percent increase in December from a year earlier.