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British economy shrinks 1.9 percent in Q1

British economy shrinks 1.9 percent in first quarter, biggest decline in nearly 30 years

Pan Pylas, AP Business Writer

On Friday April 24, 2009, 6:14 am EDT

LONDON (AP) -- The British economy shrank in the first quarter at its sharpest rate since the early days of Margaret Thatcher's government 30 years ago as the financial crisis continued to wreak havoc on banks, retailing and manufacturing.

In its first estimate for the January-March period, the Office for National Statistics said Friday that gross domestic product, or GDP, contracted by a massive 1.9 percent from the previous three month period -- the biggest drop since 2.4 percent posted in the third quarter of 1979.

That was far more than the 1.6 percent decline posted in the fourth quarter of 2008 and above analysts' expectations for a more modest 1.4 percent drop. This was the first time two successive quarters have contracted by more than a percentage point since records began in 1948.

The latest decline means that Britain's economy has shrunk for three consecutive quarters and there are very few indications that things will improve in the near future.

Compared with a year ago, Britain's GDP was 4.1 percent lower in the first quarter.

Earlier this week, the British government laid out the hope the economy will start to grow towards the end of this year but still forecast that output this year will shrink by a post-World War II record of 3.5 percent.

The average postwar recession in Britain has lasted for around 15 months, which would, if replicated during this current downturn, mean that the economy 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.

"It's early days yet, but the drop opens up the possibility of GDP in 2009 as a whole falling by even more than the 4 percent we currently expect," said Vicky Redwood, economist at Capital Economics.

According to the International Monetary Fund's latest forecasts, Britain will likely be one of the worst hit economies because of its dependence on the housing and financial sectors. The IMF is projecting that Britain's output will contract by 4.1 percent this year, much more than its previous forecast of a 2.8 percent decline.

A more detailed look at the figures shows that the weakness in the economy was broad-based, 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.

In a separate release, the statistics office said retail sales during March rose by a monthly 0.3 percent, primarily because of higher food sales and some buying of clothing and footwear in the early spring sunshine.

Though the retail sales news provided some comfort as it suggested that the rate the British economy is contracting may be moderating, it was not enough to deflect attention from the output decline of the first quarter.

"The better-than-expected retail sales release cannot hope to compete with headlines that the economy is shrinking at its fastest rate since the grim days of the late 1970s," said Daragh Maher, an analyst at Calyon Credit Agricole.

The markets did not react much to the news as their focus remained centered on whether Britain will have its credit rating downgraded after finance minister Alistair Darling confirmed massive government borrowing in the years ahead.

In his budget on Wednesday, Darling said net borrowing is likely to hit 175 billion pounds in 2009-10, or 12 percent of gross domestic product and remain high for years to come.

Though British government bonds are considered relatively safe assets, demand for some recent auctions has not been enough to meet the supply being offered, stoking concerns that the levels of debt are unsustainable.

Credit ratings agency Moody's Investor Services said Friday that it was not putting Britain on notice for a possible downgrade, though it conceded that the pace of deterioration in the public finances is "considerable."

It said that a comparatively low level of debt initially -- Britain's debt ratio to GDP was around 40 percent as it entered the recession, lower than other developed countries around the world -- means that Britain is "so far not an outlier" among countries with a triple A rating, the highest possible, and said that its rating outlook was "stable."

Moody's said a downgrade in Britain's rating was possible if for one reason or another the country loses its flexibility or the government is unwilling or unable to take the actions necessary to restore a measure of fiscal health.

"Should in particular the latter condition not be fulfilled, and the government choose to operate with a structurally higher level of indebtedness, this would likely have rating implications over time," Moody's said.

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