U.K. Shrinks Most Since Thatcher Era Dawned in 1979 (Update2)

U.K. Shrinks Most Since Thatcher Era Dawned in 1979 (Update2)

April 24 (Bloomberg) -- The U.K. economy shrank more than economists forecast in the first quarter in the biggest contraction since Margaret Thatcher came to power in 1979.

Gross domestic product fell 1.9 percent from the final three months of 2008 as manufacturing and business services posted record declines, the Office for National Statistics said today in London. The median prediction in a Bloomberg News survey was 1.5 percent. On the year, GDP slumped 4.1 percent.

The recession, which may turn out to be the worst since the 1930s, prompted Prime Minister Gordon Brown’s government to say this week that the budget deficit may swell to a record and is casting doubt on Britain’s credit rating. The Bank of England nevertheless argues the slump may be easing as they print money to stave off deflation and keep rates at a record low.

“It’s shockingly bad,” said Alan Clarke, an economist at BNP Paribas SA in London. “People still aren’t pessimistic enough. This casts shadows over any green shoots of recovery. This recession will be more prolonged than people expect.”

The pound was little changed against the euro and the dollar after the figures were released and traded at $1.4607 at 11:17 a.m. in London.

The U.K. is the first Group of Seven nation to report first quarter GDP data. Leaders from the G-7 meet in Washington today as unemployment, deflation and toxic bank assets still stand in the way of a rebound from the global recession.

European Economy

Reports today gave a mixed picture about the health of Europe’s economy. Spanish unemployment rose to a decade-high of 17.4 percent, while Germany’s Ifo business confidence index rose for the first time in 11 months.

U.K. business services and finance shrank 1.8 percent, the most since records for the category began in 1983. Manufacturing contracted 6.2 percent, the most since at least 1948, the statistics office said.

The worsening recession may see Britain’s economy shrink by the most since 1931 this year, the London-based Centre for Economics and Business Research said today, forecasting a 4.5 percent annual contraction.

This is the first time GDP has contracted by more than 1 percent for two consecutive quarters since modern records began after World War II. GDP declined 1.6 percent in the fourth quarter of 2008.

‘Anxious’ Consumers

“The best we can say is that the pace of economic decline may slow in the coming months,” said John Cridland, deputy- director general at the Confederation of British Industry. “Given that unemployment will continue rising sharply, even if businesses begin to see the rate of decline in activity starting to ease, consumers are likely to feel anxious.”

The economy last shrank by more in the third quarter of 1979. Labour Prime Minister James Callaghan began that year by saying he wouldn’t declare a state of emergency and denying that the country had been left in chaos because of rampant strikes. Margaret Thatcher replaced him as the nation’s first female premier after the Conservative Party won the election in May.

Brown must hold an election by June 3 next year. His ruling Labour party trails the opposition Conservatives in opinion polls, lagging by 19 percent in a BPIX poll published April 19.

Chancellor of the Exchequer Alistair Darling predicted in his April 22 budget that the economy will contract about 3.5 percent this year, and rebound with a 1.25 percent expansion in 2010. That’s at odds with the International Monetary Fund, which predicts a GDP drop of 0.4 percent next year after shrinking 4.1 percent in 2009.

Public Finances

Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues and the accumulation of sizeable assets and contingent liabilities as a result of successive bank bailouts,” analysts at Moody’s including Arnaud Mares in London wrote in a report yesterday. “The government is taking risks with public finances.”

Brown told reporters today that he’s satisfied Britain will retain its top sovereign credit rating. He has spent 1.4 trillion pounds ($2.1 trillion) bailing out British banks crippled by the crisis, pushing this year’s budget deficit to 12.4 percent of GDP, the highest of any Group of 20 nation.

Darling this week offered motorists a 2,000-pound ($2,928) payment to trade in old cars for new ones to stem job losses at manufacturers. Auto sales slid 31 percent in March.

Lloyds Banking Group Plc, which has received billions of pounds of state guarantees, said yesterday it will cut 985 jobs. Michael Page International Plc, the U.K.’s second-largest recruitment company, said April 7 first-quarter profit slumped 32 percent as the pace of layoffs increased.

Rising Unemployment

U.K. unemployment rose in March to the highest level since Brown’s Labour Party came to power in 1997 as the recession forced companies to cut jobs.

Retail sales still climbed 0.3 percent in March, the statistics office said in a separate report today. Economists predicted a 0.3 percent drop, according to the median of 26 forecasts in a Bloomberg News survey. Debenhams Plc, the U.K.’s second-biggest department story company, said yesterday that sales rose and profit margins increase.

Bank of England policy makers said there are signs the pace of economic contraction may be moderating, minutes of their April 9 meeting show. The bank is spending 75 billion pounds to buy bonds with newly created money after it cut the key interest rate to 0.5 percent, the lowest since it was founded in 1694.

U.K. Bailout Fruit Is Left Unshared

SARA SCHAEFER MUñOZ

LONDON -- After receiving billions in taxpayer support, U.K. banks have promised to go easier on struggling borrowers. But they are putting the squeeze on some consumers.

Martin Baker, an engineer in southeast England, is one of those feeling the clench. Despite the recession and the demise of his wife's child-play-group business, they have kept current on their mortgage but struggled to make modest payments on £12,000, or about $18,000, in personal and credit-card debt, he said.

In February, though, Mr. Baker got a letter from Royal Bank of Scotland Group PLC demanding full payment on a £6,000 liability for a two-year-old overdraft related to his wife's business, he said. Mr. Baker offered to pay £20 a month, but was told that the bank would settle for nothing less than £700 a month.

Associated Press

Pedestrians pass a branch of The Royal Bank of Scotland in London on Tuesday.

If he didn't pay, the bank would seek a lien on his home and try to force a sale, he said.

"Just when you think things cannot possibly get worse ... this bombshell comes along," said Mr. Baker, adding that the situation has strained his marriage and left him fearing bankruptcy. "I've got nothing to fall back on."

An RBS spokeswoman said the bank couldn't immediately comment on Mr. Baker's specific situation, but it works with customers "to turn any situation around," noting that the company recently established a team of 500 additional employees to help struggling borrowers.

Prime Minister Gordon Brown's government has urged leniency with borrowers facing tough times, including giving more time to credit-card customers already in payment talks with a debt-assistance agency. Mr. Brown's administration also struck a deal with U.K. mortgage lenders to help some homeowners defer mortgage payments for as long as two years.

The U.K. Treasury said: "We are constantly talking to banks to try to get a full picture of how they are managing relationships with their customers and the pressures they are under."

"The banks are under pressure by government to deal with people who are falling into difficulties," said Tim Gray, a partner and dispute-resolution solicitor at Clough & Willis Solicitors in Bury, who works with lenders and consumers. "But there is an increasing pressure on financial institutions to recover as many funds as they can."

According to Sanford Bernstein, there was about £45 billion in outstanding credit-card debt and £75 billion in personal loans and overdrafts in the U.K. last year. U.K. lenders could have about £17.7 billion in losses in 2009 and 2010 on those debts, the research firm estimated.

The situation partly is a hangover from years when U.K. consumers willingly took advantage of easy credit. According to the most recent data from the Organization for Economic Cooperation and Development, consumer debt in the U.K. was 186% of annual disposable income in 2007, the highest level of any developed country with available figures. In the U.S., that number was 142%.

Individual bankruptcies in England and Wales were 19,100 in the fourth quarter, up 22% from a year earlier and a 9.4% rise from 2008's third quarter.

With many more loan delinquencies looming, creditors are ratcheting up the pressure when they can. Some lenders have hired outside collectors to bypass landlords behind on their mortgage payments by trying to collect rent directly from tenants. In some parts of the U.K., there has been an upswing in the use of charging orders, which press for payment on an unsecured loan by putting a lien on someone's house. The process also damages a person's credit.

Big U.K. banks that use charging orders include RBS, Lloyds Banking Group PLC and nationalized Northern Rock, all recipients of bailouts from the U.K. government.

"We are seeing a drop in people's disposable income, so they've no money to even offer the creditors," said Ian Boden-Smyth, social-policy coordinator for the U.K. Insolvency Helpline, which provides debt advice to borrowers.

Bank officials said they are committed to working with delinquent borrowers, using charging orders only in rare circumstances and as a last resort if they have been unable to work out a payment plan. A spokeswoman for the Credit Services Association, a trade group representing debt-collection agencies, said charging orders are a legitimate debt-recovery practice that can help borrowers defer immediate payment of debts.

Mr. Baker said he realizes his family is responsible for running up large debts. But it bothers him that the U.K. government's rescues of banks haven't helped him get any relief.

"Who's bailed out these banks when they've made bad decisions? Us," he said. "Who has bailed me out when I've made bad decisions? Nobody."

King Says U.K. in Deep Recession, Pledges More Easing (Update4)

King Says U.K. in Deep Recession, Pledges More Easing (Update4)

Feb. 11 (Bloomberg) -- Bank of England Governor Mervyn King said the U.K. is in a “deep recession” that may force policy makers to create money and pump it into the economy after cutting interest rates to a record low.

“Further easing in monetary policy may well be required,” said King at a press conference in London after presenting the central bank’s revised quarterly forecasts today. “That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending.”

Bonds jumped after the remarks, which mark a shift in focus to unconventional measures after the deepest rate cuts in the central bank’s history failed to stave off a recession that may be the worst since World War II. The yield on the two-year government bond fell 25 basis points to 1.36 percent.

“We now expect the Monetary Policy Committee to cut rates to zero at the March meeting and introduce quantitative easing,” said Michael Saunders, chief Western European economist at Citigroup Inc. in London. That will probably include “purchases of a range of assets, including gilts but also private sector assets.”

The Bank of England’s Monetary Policy Committee, which cut its benchmark interest rate to 1 percent this month, next meets to decide on rates on March 5. King, 60, said that policy makers can start using new tools before rates fall to zero because “we’re getting to the point where the efficiency of further cuts is diminished.”

King ‘Defeatist’

“It was a very defeatist press conference,” said David Tinsley, an economist at National Australia Bank on London and a former central bank official. “The fire has gone out of him a bit. There’s not much left in the kitty.”

King interrupted reporters and reprimanded some for not listening to what he had said in previous statements. He refused to apologize for failing to foresee the crisis, saying “I’m not paid to forecast the future.”

Prime Minister Gordon Brown has already given King authority to buy securities using government money and King today indicated officials may go beyond the existing plan.

Under quantitative easing, the bank would create money and use it to buy securities such as government and corporate bonds. That would boost liquidity in credit markets and increase the supply of money flowing through the economy.

“If we were to go to the wider operation, the MPC could decide that it wished to conduct such operations financed by the creation of central bank money,” said King today.

‘Shock and Awe’

The governor, reappointed for a second five-year term by Brown last year, is responding to criticism that the Bank of England hasn’t acted fast enough to the crisis. Former policy maker Sushil Wadhwani said yesterday the central bank should adopt “shock and awe” tactics. Fathom Financial Consulting, a firm founded by a group of former central bank economists, yesterday urged the government to buy houses as a means to increase the money supply.

“We need quantitative easing, we need credit easing and we probably need a bit more fiscal stimulus,” said Wadhwani in an interview yesterday.

The deteriorating economy is eroding Brown’s popularity, which fell to a six-month low in a poll published in yesterday’s Times newspaper. The Bank of England forecasts show the economy will contract at an annual 4 percent rate by the end of the first quarter. Unemployment rose to the highest since 1999 in January.

Brown’s Support

Support for Brown fell five points in the last month to 28 percent, while the Conservative opposition retained the backing of 42 percent of voters, a survey by Populus Ltd. showed.

The Bank of England said today it’s concerned about a “more prolonged period of weak credit availability” if actions taken to stabilize the global banking system don’t prove wholly successful. That’s “a significant downside risk,” the bank said.

Inflation will slow to 0.5 percent at the end of 2010, said the bank, which has a target of 2 percent.

“Given its remit to keep inflation on track to meet the 2 percent target in the medium term, the projections published by the committee today imply that further easing in monetary policy may well be required,” said King.

Central banks are pushing rates towards zero across the globe, forcing them to use new tools to rescue their economies. Sweden’s central bank lowered the benchmark rate by a percentage point to 1 percent, twice as much as expected, and rates in the U.S. and Japan are already close to zero.

BOE Forecasts

The Bank of England forecasts are based on market expectations of the benchmark rate falling from the current 1 percent to 0.7 percent in the third quarter. The bank publishes its quarterly predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week.

Britain faces the worst recession among Group of Seven nations, the International Monetary Fund forecasts. World growth will slow to 0.5 percent this year, the least since the end of World War II, the IMF said.

The U.K.’s inflation rate fell the most since at least 1997 in December. Consumer prices rose an annual 3.1 percent, compared with 4.1 percent the previous month.