U.K. economy sinks deeper into recession

LONDON -- The British economy sank deeper into its longest recession on record, with figures released Friday showing an unexpected fall in third-quarter gross domestic product that dashed hopes of a long-awaited turnaround here.

The severity and length of the British downturn are underscoring the uneven recovery taking place in the aftermath of the global recession, with the rebound in Europe particularly patchy. The region's largest economies -- Germany and France -- became the first wealthy nations to emerge from recession during the summer. But other nations, including Britain, Ireland and Spain, are still struggling with far deeper problems -- including U.S.-style real estate busts and the bursting of financial asset bubbles.

Leading economists had forecast that Britain would post weak growth for the three months ending in September, but instead, the economy fell 0.4 percent, the sixth consecutive quarterly drop. The data came after a leading British think tank, the National Institute for Economics and Social Research, predicted in a report this week that the economy here would be among the worst hit by the global financial crisis.

The fall was broad-based, led down by a 0.2 percent drop in the services sector -- from financial services to hotels and catering. Industrial production, manufacturing and construction also fell. Though retail sales showed some improvement, most of that came in July, with August and September showing flat consumer spending.

The news sent the pound -- a currency as hard-hit as the dollar in recent months -- immediately down against the greenback and the euro. Analysts said the still-weak economy may force the Bank of England to continue a policy of buying British bonds, something that could further drag down the value of the once-mighty pound.

Britain's options for fighting the crisis have also become more tricky. Though this nation has rolled out a large government stimulus package, as countries have done around the world, its budget is now under so much pressure that many predict the government may soon need to begin making painful cuts. That could put even more downward pressure on the economy as it struggles to find its footing.

"For years, revenue growth came from the booming [financial district in London]," said Stephen King, chief economist with HSBC in London. "But the revenue isn't coming in anymore and they will have to consider sizeable spending cuts. The prospect now is for a number of years of government austerity."

The news also poses fresh challenges to Prime Minister Gordon Brown. The country's widely unpopular leader is set to call elections before June, with his Labor Party hoping a strong recovery could improve its currently dim prospects of victory. Brown -- who previously served as Chancellor of the Exchequer, or treasury secretary, for more than a decade -- has sought to portray himself as uniquely suited to managing the crisis.