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Economy nears recession after shrinking in third quarter

 LONDON (AFP) — Britain's economy shrank 0.5 percent in the three months to September, placing it perilously close to recession as it feels the chill from the global financial crisis, official data showed Wednesday.

That marked the first quarterly contraction since 1992 and was the largest drop since 1990 amid mounting gloom about the spreading global impact of the credit crunch.

The economy had already screeched to a halt in the second quarter to record zero growth, the Office for National Statistics added in a statement which confirmed initial third-quarter estimates that were given in October.

Britain is not officially in recession unless it reports two quarters running of negative economic growth, or contraction.

Earlier this week, the government launched an economic stimulus package of 20 billion pounds in a bid to reignite consumer spending and fight back against the looming recession.

However, Chancellor Alistair Darling also said in his pre-budget report that he forecast the economy would shrink in 2009 and would not recover until 2010.

Economists said Wednesday's data illustrated that the country was sliding into a painful recession and raised expectations of more interest rate cuts from the Bank of England.

"While contraction in the third quarter does not put the UK officially into technical recession yet... it is impossible to dispute that we are there," said IHS Global Insight economist Howard Archer.

"Indeed, it looks horribly like the fourth quarter will see even deeper contraction as the heightened financial crisis and deepening global slowdown increasingly reinforce the problems facing the UK economy."

Gross domestic product (GDP) grew by just 0.3 percent during the third quarter compared with the July-September period in 2007, the ONS added.

"Overall, there is nothing here to suggest that the economy is not going to carry on contracting for a prolonged period," said Jonathan Loynes, chief European economist at the Capital Economics consultancy in London.

"We continue to expect GDP to fall by around 1.5 percent next year and by another 1.0 percent or so in 2010."

On Monday, the government slashed its official economic growth forecasts.

Darling said the economy was forecast to shrink by 0.75-1.25 percent in 2009. That was a major downgrade from the previous growth estimate of 2.25-2.75 percent given in March.

The 2008 growth forecast was put at 0.75 percent, which also was a sharp revision from prior guidance of 1.75-2.25 percent GDP expansion.

The country's economy was meanwhile forecast to rebound in 2010 with growth of 1.5-2.0 percent and would continue to recover in the following years, Darling added.

The Organisation for Economic Cooperation and Development said Tuesday that a severe downturn would drag Britain's economy under for most of 2009.

The Bank of England in November cut interest rates by 150 basis points to a 53-year low of three percent amid a looming recession and easing inflationary pressures. The December rate call is due next week.

Archer added: "We expect the Bank of England to cut interest rates sharply further next week as it tries to limit the length and depth of the recession."

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