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Sunday, 25 January 2009

Recession grips Britain

LONDON - BRITAIN is in recession for the first time since 1991, official data showed on Friday, triggering a plea from Prime Minister Gordon Brown for renewed international cooperation to tackle the financial crisis.

The Office for National Statistics (ONS) said that gross domestic product (GDP) had shrunk by 1.5 per cent in the fourth quarter of 2008 compared with the previous three-month period when it contracted by 0.6 per cent.

The figure for the final quarter of 2008 showed the biggest fall in GDP since 1980.

Mr Brown said on Friday he was using 'every weapon at our disposal' to fight the economic crisis.

'But we need the international cooperation as well,' he told BBC radio.

Friday's data sent the British pound sliding to a 23-year low versus the dollar and London's FTSE 100 index of top shares to under 4,000 points.

The generally-used technical definition of a recession is two quarters running of negative economic growth.

Analysts warned of a long journey ahead before the British economy recovered.

'Our current forecast is for UK GDP to contract by 2.9 per cent in 2009, with declines in output occurring through all four quarters,' said Howard Archer of IHS Global Insight.

'This would be the sharpest contraction since World War II. Furthermore, we see GDP only flat overall in 2010 as recovery develops very gradually.' The British economy grew by 0.7 per cent in 2008, the slowest annual rate since 1992, the ONS said on Friday.

Britain joins the United States, the eurozone and Japan in recession as the global economy struggles to recover from the fallout of the credit crisis.

Germany on Wednesday said it would suffer its worst recession since World War II this year, with half a million more people in Europe's biggest economy expected to lose their jobs.

British finance minister Alistair Darling acknowledged on Friday that the recovery would not occur 'overnight', but refused to estimate how long the recession would last.

'The action we are taking will take time,' he told Channel 4 News. 'There are no quick fixes. There is no overnight solution to this.'

In Britain, the unemployment rate has jumped to a decade-high 6.1 per cent with nearly two million out of work as international groups such as Nissan have slashed local jobs and several retailers have collapsed.

Banks have also cut staff as they continue to be bailed out by the government to the tune of billions of pounds.

In a bid to stave off a deep recession, the Bank of England (BoE) has slashed British interest rates to an all-time low of 1.5 per cent.

However tumbling borrowing costs have deterred foreign investment, severely hurting the pound, which this week also struck an all-time low against the yen and has reached near-parity with the euro.

The BoE's monetary policy committee earlier this month voted 8-1 to cut interest rates by half a per centage point to the lowest level since the central bank's formation in 1694.

One policymaker, David Blanchflower, voted in favour of cutting rates by 100 basis points, arguing that it was 'becoming increasingly probable that there would be a deep and prolonged recession.' 'Our call is still that the committee will bring rates down by a further 0.5 per cent to 1.0 per cent next month, although the weakness of sterling, which has intensified today (Friday), provides a risk that rates remain on hold at 1.5 per cent for a while longer,' said Investec Securities analyst Philip Shaw.

The BoE's main task is to keep inflation at a government-set target of 2.0 per cent.

British 12-month inflation dived in December owing to a tax cut on goods and services, falling energy prices and heavy pre-Christmas discounting, official data showed Tuesday.

The Consumer Prices Index (CPI) annual inflation rate sank to 3.1 per cent in December, the lowest level since April 2008, from 4.1 per cent in November.

The BoE is meanwhile considering increasing money supply to ensure growth at all costs does not slow so much that inflation falls below target.

BoE governor Mervyn King told businessmen on Tuesday that the bank was considering the 'unconventional measures' that the government placed at its disposal as part of a new rescue package for banks unveiled this week.

The government on Monday unveiled a second multi-billion-pound bank rescue package aimed at kick-starting its stalled economy but financial shares plummeted amid growing fears of deepening recession.

Reports suggest the latest bailout - which may boost an ailing housing market - is worth some 200 billion pounds (S$414 billion). -- AFP

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