The UK economy contracted the most since 1980 in the fourth quarter as the financial crisis prompted spending by consumers and companies to shrivel.
Gross domestic product fell 1.5 per cent from the third quarter, matching the previous estimate, the Office for National Statistics said today in London. Consumer spending declined 0.7 per cent on the quarter, the most since 1991, while fixed investment dropped 2.3 per cent.
The British economy needs additional stimulus to stem the recession and head off the risk of deflation, Bank of England policy maker Andrew Sentance said on Monday. Prime Minister Gordon Brown’s government may announce further measures this week to support banks including Royal Bank of Scotland Group Plc as the financial crisis persists. “The UK economy is certainly in a recession if not a mini depression,” Neil Mackinnon, chief economist at ECU Plc in London and a former UK Treasury official, said in an interview on Bloomberg Television.
“Things are likely to get worse before they get better.”
The central bank will take its next decision on March 5. Policy makers have already cut the benchmark interest rate to 1 per cent, a record low, and have signalled they want the power to create money to help stimulate the economy.
The drop in gross domestic product was less than the 1.6 per cent median forecast of 26 economists in a Bloomberg News survey. On the year, GDP fell 1.9 per cent, exceeding the median prediction of 1.8 per cent.
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Retailers Stylo Plc, JJB Sports Plc, Woolworths Group Plc, Zavvi Group and Adams Childrenswear Ltd are among the UK business that have collapsed in the past six months as consumers cut spending.
Barratt Developments Plc, the UK’s second-biggest homebuilder by volume, on Tuesday wrote down the value of land holdings and unfinished stock by $719.4 million (£495 million) amid Britain’s biggest housing slump in 30 years.
Tuesday’s report showed that industrial production dropped 4.5 per cent in the quarter, compared with a previous estimate of 3.9 per cent. Manufacturing fell 5.1 per cent, down from an estimate of 4.6 per cent, the statistics office said.
Officials revised up their measure of the drop in services on the quarter. The category fell 0.9 per cent instead of a previous estimate of a 1 per cent decline.
Outside risk
Sentance said on Monday he sees an “outside risk” of “persistent” price declines. Deputy Governor John Gieve said February 20 that Britain faced a risk of a decade-long depression. Both officials said economic stimulus from the central bank and the government will stem the slide in growth.
Chancellor of the Exchequer Alistair Darling has ordered Northern Rock Plc to expand lending by 14 billion pounds. The Treasury will provide details this week on a program to guarantee hundreds of billions of pounds in loans.
Royal Bank of Scotland plans to cut costs by more than 1 billion pounds and segregate toxic assets in a new unit as it prepares for the government insurance program, according to a person familiar with the situation.
To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net.