U.K. Economy May Be Shrinking the Most Since 1990, Niesr Says

U.K. Economy May Be Shrinking the Most Since 1990, Niesr Says


Dec. 10 (Bloomberg) -- The U.K. economy may contract at the fastest pace since 1990 in the current quarter as the recession intensifies, the National Institute for Economic and Social Research said.

Gross domestic product fell 1 percent in the three months through November and will probably plunge more than that in the last three months of the year, the London-based institute, whose clients include the central bank, said in a statement today. The economy last shrank at such a speed in the third quarter of 1990, when it contracted 1.2 percent.

“The figures make clear that the rate of output decline is accelerating,” Niesr said in a statement. “The problem that” the government “needs to address very urgently is the availability of bank credit; further interest-rate reductions are unlikely to have much effect.”

Bank of England policy maker Andrew Sentance said yesterday that the recession will likely be as long and deep as any since the 1970s. Prime Minister Gordon Brown has cut taxes and pledged 50 billion pounds ($74 billion) in a bank rescue to bolster the economy, while the central bank has reduced the key interest rate to 2 percent, the lowest since 1951.

Banks are shunning new lending as they rebuild their balance sheets, which were damaged by the global financial crisis. Housing sales fell by the most since 1978 last month, the Royal Institution of Chartered Surveyors said yesterday.

Passing On Cuts

Lenders passed on less than half the 1.5 percentage point Bank of England interest-rate reduction last month to customers, a report showed yesterday. The central bank, which predicted in November that the economy will contract through much of next year, followed up with a one-point cut on Dec. 4.

Manufacturing output fell 1.4 percent in October from September, extending its worst stretch since 1980, the statistics office said yesterday. Jobless claims rose at the fastest pace since 1992 in October.

“This recession is likely to be comparable in length and depth with the previous three major post-war U.K. downturns in the mid-70s, early-80s and early-90s,” Sentance said. “In each of these earlier episodes, the output of the economy fell by at least 2.5 percent over a period of a year or more.”

Brown bolstered his popularity by promising a 20-billion pound stimulus package on Nov. 24, the biggest in two decades, reducing sales tax to bolster consumer spending.

“The government faces the real risk that, despite the measures it took, output will fall more sharply than it expected to the end of next year,” Niesr said. “There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than 1 percent in magnitude.”

BLOOMBERG