U.K. GDP Shrinks, First Recession Since 1991 Looms

-- The U.K. economy shrank more than forecast in the third quarter as the financial crisis ravaged industries from banking to construction, evidence that Britain is in the grips of its first recession since 1991.

Gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992, the Office for National Statistics said today in London. Economists predicted a 0.2 percent decline, according to the median of 35 forecasts in a Bloomberg News survey. Growth stalled in the prior three months.

The pound dropped and U.K. stocks fell after the report, which confirmed Prime Minister Gordon Brown's prediction this week that a recession is likely. His government's 500 billion- pound ($805 billion) bank rescue package and the Bank of England's half-point rate cut this month, the biggest since 2001, may have come too late to prevent further contraction.

``It's pretty bleak and it looks ever more likely that we're going to have a recession that resembles what we saw in the early 1990s,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``We'll see another half point cut at the bank's next meeting, if not sooner.''

The pound fell as much as 0.5 percent after the report and traded at $1.5599 as of 9:42 a.m. in London. The currency dropped below $1.60 before the release of the data for the first time in five years. The FTSE 100 benchmark stock index fell 0.9 percent to 3840.27.

IMF Forecast

The U.K. is the first of the Group of Seven nations to announce GDP figures for the third quarter. The International Monetary Fund said Oct. 8 the world's advanced economies will next year grow at the slowest pace since 1982 as the U.S. falters, and global growth will be 3 percent, what the group says is the dividing line between world expansion and recession.

Service industries, accounting for 75 percent of the economy, shrank 0.4 percent in the quarter, the first contraction since 1992, the statistics office said. Business services and finance output dropped 0.4 percent, the first decline since 2002.

Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc got a 37 billion-pound bailout from the U.K. government this month after money market tensions undermined investor confidence in banks around the world.

Manufacturing production dropped 1 percent and construction slipped 0.8 percent as both areas of the economy fell into a recession, the statistics office said. Together they make up about 20 percent of gross domestic product.

Economic Slowdown

Manganese Bronze Holdings Plc, the biggest maker of London's iconic black cabs, fell the most in at least 19 years on Oct. 22 after the global financial crisis and economic slowdown sent taxi sales plunging. Travis Perkins Plc, the U.K. building materials distributor that owns the Wickes home- improvement chain, dropped the most in 19 years on Oct. 16 after saying it plans to scrap its dividend to hoard cash.

Bank of England Governor Mervyn King said Oct. 22 economic news has ``probably been the worst in such a short period for a very considerable time,'' and that ``it now seems likely that the U.K. economy is entering a recession.'' He said policy makers will act ``promptly'' to keep inflation from slowing too much.

All but one of 21 economists in a Bloomberg survey forecast the bank will lower the key rate at least a half point by the end of the year from the current 4.5 percent.

The governor's remarks came after the Bank of England joined the European Central Bank, the U.S. Federal Reserve, and counterparts around the world in a coordinated half-point rate cut on Oct. 8 to stem the financial crisis.

Credit Losses

Lenders worldwide have had more than $660 billion of writedowns and credit losses from a credit freeze that a succession of government bailout plans has yet to unlock. U.S. lawmakers are considering a second fiscal stimulus and Italy, Germany and France are looking at tax breaks to shield the economy from the financial market fallout.

Brown gained popular support at the expense of the Conservative opposition after he announced the bank rescue plan. His Labour Party rose 6 points to 30 percent among those certain to vote, while the Conservative Party fell 7 points to 45 percent, according to an Ipsos MORI Ltd poll released this week.

Brown said two days ago that officials must ``take action on the global financial recession'' to protect the U.K. economy. Unemployment has already risen at the fastest place in 17 years, and economists including Michael Saunders at Citigroup Inc. say more job losses will follow.

``We doubt that the economy will be able to avoid the impending contraction,'' George Buckley, economist at Deutsche Bank AG, said in a research note.