British Economy Shrinks at Record Pace

The British economy plunged at twice the rate predicted in the second quarter, dashing recovery hopes there and heightening fears that Europe overall may lag the United States and Asia in pulling out of the global recession.

Britain's dismal contraction in the second quarter -- at a rate of 5.6 percent for the three months ended in June compared with the same period last year -- underscored how severe the economic crisis continues to be in key economies around the world despite increasing signs of stabilization in the United States. The GDP fell at its fastest yearly pace since records began in 1955.

The data in Britain -- the first major industrialized economy to post second quarter figures -- also illustrated how its recession appears to be deeper and potentially more protracted than the downturns facing many of its neighbors. The gloom there came even as a smattering of moderately positive data emerged in other parts of Europe on Friday. German investor sentiment, for instance, notched up to its highest level since October. A key index of manufacturing and service industries in the 16 nations that use the euro also edged higher.

As a result, the British pound fell Friday against the dollar and the euro.

The British data "provide a really nasty and disappointing shock, with the rate of contraction slowing far less markedly than expected," said Howard Archer, chief UK and European economist for IHS Global Insight. "Furthermore, there continue to be serious economic and financial obstacles to return to sustainable growth."

Although the economy shrank more modestly in the second quarter than it did during the first three months of the year, analysts had expected a far smaller contraction. The downturn was fueled by continued drops in construction, manufacturing and the service sector, undercutting hopes of a turnaround in what has become Britain's worst recession in at least 30 years.

That is bad news for the British government, particularly given predictions by Alistair Darling, Britain's chancellor of the exchequer, or finance minister, for a return to growth by the end of this year. It may also put new pressure on highly unpopular Prime Minister Gordon Brown to push for more stimulus spending at a time when British debt is already ballooning.

Though Britain is feeling a deeper pinch than much of Europe, analysts say the region overall is expected to recover more slowly than the United States and perhaps even hard-hit Japan. Critics continue to blame a slower response on cleansing bad bank balance sheets and a tighter rein on monetary policy in the euro zone.

"There was a very slow reaction to the severity of the crisis in Europe," said Brad Durham, managing director of EPFR Global, an investment tracking firm. "And that has fueled the perception that they are going to be slower to emerge from the crisis than the United States or Asia."