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Britain looking at depression

THE United Kingdom economy shrank more than economists forecast during the fourth quarter, as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said yesterday, more than the 1.2 percent economists predicted. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and UK stocks fell after the report. Prime Minister Gordon Brown said yesterday that the government is using "every weapon at our disposal" to fight the crisis.

The Bank of England Governor Mervyn King - who has dropped the benchmark rate to 1.5 percent, the lowest since the bank was founded in 1694 - said that officials may start buying up securities soon as interest rates lose their potency to aid the economy.

"This is undeniably grim," said Stewart Robertson, an economist at Aviva Investors in London. "Two or three quarters more like this and you're talking about depression."

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.

Six polls this year show Brown's Labour Party trailing further behind David Cameron's Conservatives. This week Brown pledged to extend the bank rescue announced last year and boost the government's stake in Royal Bank of Scotland Group Plc to 70 percent. RBS may post an annual loss of 28 billion pounds (US$39 billion), the biggest in British corporate history.

The currency's slide to a 23-year low against the dollar this week signals that investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co strategists wrote this week.

The European Commission forecasts that the UK economy may contract 2.8 percent this year, the most since 1946 when Britain was demobilizing after World War II.


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