Economy shrinks by 1% as downturn worsens

Britain's economy shrank by 1 per cent in the three months to November as the pace of the downturn quickened, a leading think-tank warned today.

The National Institute of Economic and Social Research (NIESR) said "there was every reason to believe" the figure would be worse for the last three months of the year.

In a further sign of deepening economic woe gripping the country, the organisation also revised its output contraction for the three months to October to 0.8 per cent, from 0.5 per cent.

The figures "make clear that the rate of output decline is accelerating", NIESR said.

Latest official UK data showed the economy shrank 0.5 per cent between July and September - the first contraction for 16 years.

Initial estimates for how output during the three months to December has fared are due out from the Office for National Statistics next month, but they are widely expected to show the UK officially in recession.

NIESR - which is one of Britain's largest independent economic research bodies - said the reduced availability of bank lending was the main problem for policymakers to address.

It said: "The government faces the real risk that, despite the measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year.

"The main problem it needs to address very urgently is the availability of bank credit."

The Bank of England has slashed interest rates by 2.5 per cent in two months in the battle to stave off a deep UK recession.

The Government has also provided billions of pounds of funding to the UK's banking sector to boost lending to homebuyers and small businesses. It is being paid for by increased Government borrowing.

Chancellor Alistair Darling faces a grilling from MPs today over his plans.