UK economy drops as unemployment rises

Britain\’s economy is weakening fast, official data shows, with more figures due this week expected to confirm the country has sunk into recession for the first time since 1991.

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The unemployment rate jumped to a decade-high 6.1 per cent in the three months to November, with nearly two million out of work.

At the same time, the Office for National Statistics said on Wednesday that Britain\’s public finances worsened last month to show a record deficit of STG44.2 billion ($A94.76 billion) after the state bailout of Royal Bank of Scotland.

“Another dire day for the UK economy with data … showing unemployment soaring, the public finances deteriorating sharply,” IHS Global Insight analyst Howard Archer said on Wednesday.

The fact that Britain is in recession is set to be confirmed on Friday when data is expected to show the economy contracted for a second straight quarter in the final three months of 2008.

The generally used technical definition of a recession is two quarters running of negative economic growth.

In a bid to stave off a deep recession, the Bank of England (BoE) has slashed British interest rates to an all-time low of 1.5 per cent.

Policymakers voted 8-1 to cut borrowing costs earlier this month by half a percentage point to the lowest level since the central bank\’s formation in 1694, minutes of their last meeting showed on Wednesday.

In its minutes, the central bank said “the news on the month had left the balance of risks to output and inflation, relative to the target, to the downside”.

One policymaker, David Blanchflower, voted in favour of cutting rates by 100 basis points, arguing that it was “becoming increasingly probable that there would be a deep and prolonged recession”.

The BoE\’s main task is to keep inflation at the government-set target of 2.0 per cent.

British 12-month inflation dived in December owing to a tax cut on goods and services, falling energy prices and heavy pre-Christmas discounting, official data showed on Tuesday.

The Consumer Prices Index (CPI) annual inflation rate sank to 3.1 per cent in December, the lowest level since April 2008, from 4.1 per cent in November.

The Bank of England is meanwhile considering increasing money supply to ensure growth at all costs does not slow so much that inflation falls below target.

BoE governor Mervyn King told businessmen late on Tuesday that the bank was considering the “unconventional measures” that the government placed at its disposal as part of a new rescue package for banks unveiled this week.

He also warned economic output was expected to have fallen “sharply” in the last quarter of 2008 and predicted the contraction in the first half of this year would be “marked”.

The British economy contracted by 0.6 per cent in the third quarter of 2008 and the figures due on Friday are expected to show it shrank 1.3 per cent in the fourth quarter, according to analysts.

King stressed the priority was to get banks lending again to help cash-starved businesses and individuals, and said the new measures announced on Monday would help.

The government on Monday unveiled a second multi-billion pound bank rescue package aimed at kick-starting its stalled economy but financial shares plummeted amid growing fears of deepening recession.

Press reports suggest the latest bailout is worth some STG200 billion ($A428.77 billion).

The news came as Royal Bank of Scotland, now majority-owned by the taxpayer as a result of the credit crisis, forecast what would be the worst British corporate loss of up to STG28 billion ($A60 billion), in part owing to its role in the costly and mis-timed takeover of Dutch lender ABN Amro in 2007.