Shares plunge in big squeeze

SHARES dived and the pound suffered its biggest one-day fall for 37 years as Britain heads into a recession.

At one stage on Friday, shares in the FTSE-100 slumped by 372 points - more than seven per cent - amid fears about Britain's prospects and renewed turmoil on world markets.

Later it rallied to 228 points down. The Dow Jones index also registered big falls on Wall Street.

Official figures showed the economy contracted by 0.5 per cent in the last quarter - about twice as much as City analysts were predicting.

It was the worst fall in gross domestic product since 1990 and the first time Britain has seen negative growth for 16 years.

The battering for sterling sent it plummeting to as low as $1.53 - nine cents down on the day - as traders took fright at the dismal statistics.

Banks, including HSBC and Standard Chartered, were among the worst hit, while commodities companies also suffered big falls.

Chancellor Alistair Darling responded by admitting that the public faced "difficult months ahead".

City analysts warned that Britain could be facing a severe recession as "truly dire" figures revealed that the economy is contracting much faster than expected.

The Office for National Statistics figures showed the country's gross domestic product fell by 0.5 per cent in the three months to the end of September, the first such quarterly decline for 16 years.

The slump, significantly worse than predicted, sent shares and the pound tumbling.

Analysts said today's figures meant it was inevitable Britain would enter recession — officially defined as two successive quarters of negative growth — when the next quarterly statistics are published in January.

Among the reasons for today's dramatic fall in GDP was a sharp contraction in key sectors such as hotels and restaurants, where negative growth of 1.7 per cent was recorded; manufacturing, which declined by one per cent; and construction, which was 0.8 per cent down over the quarter.

Services, which account for around three quarters of the entire economy, were down 0.4 per cent, their worst performance for 18 years. As the bleak news circulated in the City, economists, who were anticipating that today's figures would show GDP down by only around 0.2 to 0.3 per cent, warned that even sharp interest rate cuts would be unable to arrest the economic decline.

Vicky Redwood of Capital Economics said: "The fact output has shrunk so much so early on in the downturn is clearly worrying. We expect the economy to contract for around two years."

UBS analyst Amit Kara said Britain now risked a "pretty severe recession", while Investec's Philip Shaw said today's news was "truly dire".

The grim assessments came as shares and the pound took a battering. The FTSE 100 fell more than seven per cent in response to the poor GDP figures and stock market turmoil in the Far East.

Sterling also fell sharply, dropping below $1.60 for the first time in five years — to $1.55 — as traders factored in the likelihood of bigger interest rate cuts.

Business leaders responded by urging the Government to help struggling firms and consumers in a bid to limit the duration and severity of the recession.

David Kern, economic adviser to the British Chambers of Commerce, said: "The economic outlook is serious. Urgent steps are needed to alleviate the worst consequences.

"Interest rates will have to be cut without delay to four per cent in November, and to 3.5 per cent shortly afterwards. Business taxes will have to be cut in the pre-Budget report, and the Government will have to insist that the vital flow of bank finance to small firms is maintained."

Steve Radley, chief economist at the Engineering Employers Federation, added: "While pockets of industry are still holding up, large parts of the real economy are being hammered hard. Business and the consumer will now be looking to the Government and the Bank of England to deliver a bold package of fiscal measures."

TUC general secretary Brendan Barber said that ministers should now show "the same commitment to fighting recession as they have done to saving the banking system".

Meanwhile, City Minister Lord Myners admitted the Prime Minister had failed to give the Bank of England sufficient powers to ensure financial stability. He said: "The Bank has been hampered by the limited instruments available to it, which is one of the reasons we're proposing new legislation."