PARIS: The British economy officially entered a recession in the fourth quarter, according to data released Friday, while in Spain, half a million more people lost their jobs during the period, pushing the unemployment rate there to the highest level in more than eight years.

British gross domestic product fell by a steep 1.5 percent from the previous quarter and was down 1.8 percent from a year earlier, the Office for National Statistics said in a preliminary estimate.

Economists had predicted a 1.2 percent quarterly drop.

The numbers confirmed what economists and consumers have known for some time: that the economy is in a recession, traditionally defined as two consecutive quarterly declines in GDP. The rate fell by 0.6 percent during the third quarter.

For the whole of 2008, GDP rose by 0.7 percent, the lowest rate since 1992, when it rose by 0.1 percent. The faster decline in output touched both services and manufacturing, and all sectors except agriculture contracted during the quarter

“The big worry is confidence,” said Gerard Lyons, chief economist at Standard Chartered in London. “A lot of bad news has yet to hit the economy, so the question is what will happen to confidence when more jobs are lost and more firms go bust.”

Lyons said he expected the recession in Britain to continue until the final quarter of this year, to be followed by “stagnation.” James Knightley, at ING, was more pessimistic, forecasting that the economy would not return to positive growth until the first quarter of 2010 after a contraction of around 3.1 percent in 2009.

The pound slid further after the report, extending its deep losses this week, and European shares fell amid continued worries about the heath of the financial sector. (Page 16)

The British data – following reports this week showing a huge budget deficit in December and a rise in the jobless rate – add to the case for policy makers to continue aggressive and unconventional measures to restore interbank lending and bolster consumer confidence, analysts said.

Prime Minister Gordon Brown announced Monday a new bailout for the British financial system that would increase the government’s control over lenders, saying it would offer banks insurance on troubled assets. The government also revised the terms of its bailout of Royal Bank of Scotland, raising its stake in the bank to 70 percent from 58 percent.

Governments in Belgium, Germany, France, Spain and the Netherlands have also announced new steps recently to bolster the capital of their lenders.

The leader of the opposition Conservative Party in Britain, David Cameron, has pounced on the string of weak data to suggest that the country runs the risk of being required to go to the International Monetary Fund for a bailout, Reuters reported. Britain last had to borrow from the fund in 1976. Brown described the remarks as ‘irresponsible.”

Alistair Darling, the chancellor of the Exchequer, told Sky News after the release that the GDP decline was “undoubtedly sharper than many people believed, partly because you’ve seen industrial production go down because the export markets have been badly affected.”

Lyons, the analyst, noted that the weak pound should eventually help lift exports.

The continued economic gloom extended to Spain, where the National Statistics Institute said the unemployment rate rose to 13.9 percent in the fourth quarter from 11.3 percent, which was already the highest in the euro zone.

The government said last week it expected unemployment to rise to 16 percent this year, while the economy would contract by 1.6 percent.

Juan Carlos Martínez Lázaro, a professor of economics at the IE Business School in Madrid, said job losses had spread from real estate and construction to services and manufacturing, as consumers spent less and Spain’s tourism season ended.

Martínez predicted that the rise in unemployment would continue this quarter, but ease in the second quarter as local governments put into action an €8 billion plan to increase spending on public infrastructure.

“The public works will help provide a lot of jobs for four, five months,” he said. “But it will only help up to a point.”

Still, there have been some slightly more positive omens from the euro area this week.

An index of purchasing managers in euro-area services and manufacturing stood at 38.5 in January from 38.2 in December, which was the lowest reading since the survey began in 1998.

The index, released Friday, is based on a survey of purchasing managers by Markit Economics. A reading below 50 indicates contraction.

Other reports this week, like the January survey of consumer confidence in Belgium and the ZEW survey of German investor sentiment, have confounded the more negative expectations of some analysts.

There was also a more upbeat note from the British retailing sector Friday. The statistics office estimated that seasonally adjusted sales volumes rose 1.6 percent in December from November.

The office noted, however, that difficulties relating to the reduction of the value-added sales tax, aggressive discounting and a longer than usual trading period made it difficult to compare the data on a seasonally adjusted basis.

Final GDP figures in Britain will be released Feb. 25.

source: Herald Tribune

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