LONDON - The British economy has officially sunk into recession, government statistics showed Friday, with output falling 1.5 per cent in the fourth quarter of last year as the financial crisis ravaged banks, retail and manufacturing.
It was the biggest decline since the early days of Margaret Thatcher's government nearly 30 years ago and prompted a further bout of selling of the British pound, which slumped to a new 23-1/2 year low against the U.S. dollar of $1.3503 and headed back towards parity against the euro.
Following the 0.6 per cent decline recorded in the third quarter, Britain is now officially in recession -- the standard definition of a recession is two quarters of economic shrinkage.
The quarter-to-quarter drop in the fourth quarter came with both services and manufacturing output sharply down in the wake of the banking crisis, the seizing up of lending and already-confirmed recessions around the world, from the U.S. to Germany and Japan.
The fourth quarter drop was larger than the 1.2 per cent predicted by most economists and means that the British economy contracted by more than at any time since the 1.8 per cent fall recorded in the second quarter of 1980 when the then new Thatcher government reined in spending to cut the budget deficit and hiked interest rates to rein in double-digit inflation.
For 2008 as a whole, GDP rose by 0.7 per cent, down on the three per cent growth in 2007, and the lowest level of growth since 1992's 0.1 per cent.
"Today's figures are the final nail in the coffin for Prime Minister Gordon Brown's claim to have ended boom and bust; the United Kingdom economy is most definitely bust at the moment," said Charles Davis, economist at the Centre for Economic and Business Research in London.
The average postwar recession in Britain has lasted for around 15 months, which would, if replicated during this current downturn, mean that the country will continue contracting until the autumn of this year. However, most economists think that this recession will last longer, and possibly last well into 2010.
All of Britain's political parties were quick to take to the airwaves following the news.
Brown again sought to put the blame on the financial crisis that has engulfed the world and argued that only through international co-operation would growth return.
"We are fighting this recession with every weapon at our disposal," he said on BBC radio.
Brown didn't say how long he thought the recession would last.
"It depends on the degree of international cooperation," he said.
The Conservative Party's spokesman on economic matters, George Osborne, lambasted Brown for putting the blame on the international situation and added that no one at home or abroad had confidence that the government could end it.
"I think we are facing an exceptionally difficult time and unfortunately the figures that have just come out today confirm this is now going to be the worst recession for a generation, and we can see the market reaction to that," he told Sky News.
The FTSE 100 index of leading British shares fell 1.8 per cent at 3,978.02, and there was carnage in the currency markets.
While striking a fresh 23-1/2 year low against the dollar, the pound was under pressure across the board. The euro was up at 0.9445 pounds from around 0.93 pounds Thursday.
"There is the risk of a full-blown crisis, and the government and the Bank of England should recognize that there is a growing loss of confidence" in the pound, said Neil Mackinnon, chief economist at ECU Group. "They have to come out and say enough is enough."
The pressure on the British authorities over the pound's sharp reversal since the summer has mounted in recent days, with French finance minister Christine Lagarde criticizing the Bank of England for its policy of benign neglect.
The Bank of England has shown little concern over the pound's slide, arguing that the drop could help rebalance the wider economy away from consuming goods to trading them, as the lower pound should help to boost exports.
But ECU Group's Mackinnon thinks that policy is "idiotic" in a world when trade is down sharply amid lower demand.
The threat now, said Mackinnon, is that foreign investors may well decide not to participate in the 150 billion pounds worth of debt auctions the government has planned this year to plug its rapidly-increasing debt burden.
That view was shared by U.S investment bank Morgan Stanley, which said in a wide-ranging note that the sharp sell-off in the pound could raise the risk of holding British assets.
A loss of fiscal faith is the "key risk" to Britain this year, according to Morgan Stanley analysts Graham Secker and Charlotte Swing, who also said that recent events make it "increasingly tempting" to equate Britain to previous emerging market currency crises, such as Argentina in 2002, Russia in 1998 and Indonesia in 1997/8.
The one thing Britain has going for it though, said Secker and Swing, is that the vast majority of its debt is denominated in pounds, unlike most emerging market crises, where debt was often denominated in a foreign currency.
"This distinction is important as it allows the government much greater flexibility to service its debt, regardless of any currency devaluation," they said.
