Britain plunges into a 'once in a lifetime crisis'

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The Independent Online

Renewed fears of a global recession sent the world's stock markets into a state of capitulation yesterday.

The UK economy shrunk for the first time since 1992 during the third quarter of this year, declining by 0.5 per cent, far worse than anticipated. In what the Deputy Governor of the Bank of England, Charles Bean, described as "a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history", investors fled from shares and virtually every other investment into the few safe havens still remaining, usually US Treasury securities and the Swiss franc.

The FTSE-100 index of leading shares fell by 5 per cent to near the lows seen during last week's gyrations. Tokyo was down almost 10 per cent, Moscow suspended trading and on Wall Street the Dow Jones industrial average also opened lower.

Dazed dealers could only respond with resignation. The banks were once again marked lower, with concerns that they may be unable to cope with the debt write-offs and losses from a protracted economic slowdown. But anxiety that even the strongest of corporations' profits will suffer from the downturn, from bad debts and difficulties financing themselves permeated every corner of the investment world.

Confirmation that the UK could indeed be on the brink of a recession deeper and longer than even the most pessimistic had feared came with the publication of the latest official figures on growth. The annual growth rate has sunk from 1.5 per cent to 0.3 per cent, its slowest pace since 1992. The 0.5 per cent shrinkage during the third quarter follows the zero growth recorded in the second quarter and leaves the nation firmly on the road to recession.

The pound continued its slide, moving close to the $1.50 mark, a six-year low – it saw its biggest one-day drop against the dollar in 16 years, falling to $1.52, before rebounding slightly to $1.58 in London trading. Last night sterling stood at an all-time low against the euro – one euro is now worth 82p. Against all currencies it is down about 15 per cent from its peak last year, and is suffering its sharpest declines since sterling was ejected from the European Exchange Rate Mechanism in 1992.

Even so, the beneficial effects on exports have yet to feed through, and the slowdown in the economy is spreading from banks to the wider economy. The GDP numbers showed that manufacturing fared badly once again, as the short-time working announced in so many British car plants in recent weeks had suggested, while the services sector, and in particular retail and distribution, is also suffering. The retail motor trade stood out as a disaster zone. The only areas of growth are in agriculture (just 1 per cent of the economy) and the public sector (around 40 per cent, and set to expand still further as the Government brings forward major infrastructure projects such as the 2012 Olympics and Crossrail).

The numbers were much worse than forecast, and City economists were outbidding each other in their description of the awfulness. Philip Shaw of Investec called them "truly dire"; Matthew Sharratt of Bank of America pronounced them "dismal"; "dreadful" was the verdict of Malcolm Barr of JP Morgan.

However, it is developments in economies far away from Britain which have triggered the latest global bout of nerves. Disappointing results from the industrial giants Sony and Toyota helped spark the sell-off in the Far East. Concerns about economies as diverse as Iceland, South Korea, Thailand, Serbia, Hungary, Ukraine, Belarus and Argentina helped build the panic. The world has increasingly relied on emerging economies, principally China, for much of its growth; but now that the Western economies are so patently weak, hopes are also fading that the emerging nations can continue to pull the world along.

Yesterday's events seemed an appropriate way to mark the 79th anniversary of the Great Crash of 1929.

At a glance: Yesterday in brief

*Alistair Darling admits Britain is moving "towards" recession after the economy shrinks 0.5 per cent between July and September – the first fall in 16 years

*The FTSE 100 index of leading shares closes down 5 per cent at 3,883.4

*Pound falls to six-year low against the dollar at $1.527

*The euro hits all-time high against sterling of 81.95p

*Crude oil prices fall below $65 per barrel amid fears of global recession, despite news that the oil-producing cartel Opec is cutting production by 1.5 million barrels a day

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