London: The British economy is teetering on the brink of recession, official data showed, revealing it shrank 0.5% in the three months to September in the first contraction since 1992.
In reaction, the pound dived to a six-year low of $1.5269 — the lowest point since August 2002 — as dealers bet on more interest rate cuts to boost the flagging economy.
The news that a recession is just around the corner also drove down the London stock market, which plunged by 9%, with the FTSE 100 index of top shares reaching a five-year low of 3,715.24 points in late morning trade.
The British economy had already shown flat performance in the second quarter with zero growth. However, Britain is not officially in recession unless it reports two quarters running of negative economic growth, or contraction.
Gross domestic product (GDP) grew by just 0.3% during the third quarter compared with the July-September period in 2007, the Office for National Statistics said in a statement on Friday.
Chancellor Alistair Darling said that he was confident Britain would weather the storm, stressing the whole globe was suffering problems from the global financial crisis.
“It will be a difficult period, but I am absolutely confident we will get through it,” Darling told the BBC.
Friday’s data was worse than analysts’ expectations of a quarterly contraction of 0.2% and annual expansion of 0.5%.
Philip Shaw of Investec said that the data was ‘truly dire’ and would increase calls for the Bank of England to make further interest rate cuts from the current level of 4.5% to ignite growth.
Earlier this month, the BoE unexpectedly cut British interest rates by a half-point to 4.5% in a coordinated international rate-cutting drive amid markets chaos stemming from the global financial crisis.
Shaw said that the BoE ‘has little choice but to continue to cut rates aggressively’ and called for a 0.5% cut at the next rate-setting meeting on 6 November.
Richard Lambert, director-general of the Confederation of British Industry (CBI), admitted that the growth figure was ‘worse than we expected, with the slowdown spreading right across the economy’.
He also called for a further 0.5% cut in interest rates ‘soon’.