U.K. Recession Worse Than Estimated on Spending Slump

The U.K. economy’s contraction in the fourth quarter was deeper than previously estimated as consumer spending and construction slumped the most since 1980.

Gross domestic product fell 1.6 percent from the third quarter, exceeding the prior measurement of 1.5 percent, which was also the median forecast of 27 economists in a Bloomberg News survey. Construction dropped 4.9 percent and consumer spending declined 1 percent.

Bank of England Chief Economist Spencer Dale said today that the British economy’s short-term prospects are “bleak.” Spending in shops and on homes has plunged after banks rationed loans and the financial crisis wiped 1.9 trillion pounds ($2.7 trillion) off consumers’ wealth. The pound fell against the dollar after the report.

“The headline figure is very disappointing,” said Philip Shaw, chief economist at Investec Securities in London. “We see the economy shrinking until the middle of the year. It’s very difficult to see it gaining any momentum of recovery until the third quarter at the earliest.”

The pound dropped as much as 0.6 percent after the release of the data, which showed the worst contraction since 1980, when Margaret Thatcher was prime minister. The U.K. currency was at $1.4290 as of 5:56 p.m. in London.

Prime Minister Gordon Brown, whose popularity has faded as the recession deepened, said agreements the government signed with Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc requiring the banks to boost lending will help the economy in the coming months.

‘Obligation to Lend’

“The banks are now under an obligation to lend 50 billion pounds,” Brown told journalists in Vina del Mar, Chile, as he finished a five-day diplomatic tour. “So the position we were in last year where the banking system had frozen, we now seeing results.”

From a year earlier, the economy shrank 2 percent in the fourth quarter, the statistics office said. That compares with the previous estimate of 1.9 percent, which matched the median forecast of 25 economists.

Officials revised their measurements of manufacturing in the quarter, saying it dropped 4.9 percent instead of 5.1 percent. Services fell 0.8 percent, compared with the previous estimate of 0.9 percent. The drop in construction was more than four times as much as the earlier measurement.

Government Spending

Government spending rose 1.3 percent, compared with the previous estimate of 1.5 percent. Fixed investment fell 1.4 percent instead of 2.3 percent as measured in the last release, the statistics office said.

U.K. retail sales posted the smallest annual gain in more than 13 years last month, the statistics office said yesterday. Sales plunged 1.9 percent from January, four times as much as economists forecast.

Next Plc, the U.K.’s second-largest clothing retailer, said yesterday full-year profit fell 15 percent as Britons cut spending at its stores and home-shopping catalog. Moss Bros Group Plc, the U.K.’s third-largest suit retailer, said yesterday it will cut capital spending by as much as 69 percent and is omitting its dividend as customers rein in spending.

Unemployment Jump

Unemployment rose at the fastest pace since 1971 in February as companies were forced to lay off staff. HSBC Holdings Plc, Europe’s biggest bank by market value, said on March 25 that about 1,200 U.K. employees may lose their jobs as it responds to a “challenging” environment.

Consumers still saved more money during the quarter. The household savings ratio rose to 4.8 percent, the most since the first three months of 2006, from 1.7 percent in the third quarter, the statistics office said.

The central bank has embarked on a program to spend as much as 150 billion pounds ($219 billion) to buy U.K. government debt, corporate bonds and other assets with newly created money in order to ease credit strains and encourage spending.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.