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Economy shrinks rapidly in Britain, Germany

WASHINGTON — The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain on Friday becoming the latest nation to surprise analysts with the depth of its economic pain.

Britain posted its worst quarterly contraction since 1980 on the heels of sharper-than-expected slowdowns reported from Germany to China to South Korea. The grim data, analysts said, underscores how the burst of the biggest credit bubble in history is seeping into the real economies around the world, silencing construction cranes, bankrupting businesses and throwing millions of people out of work.

"In just the past few days, we've had a big downward revision. We're seeing that an even bigger deceleration is on the way than we thought," said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics.

The depth of the troubles, analysts say, indicates that nations may need to spend more than the billions of dollars already planned on stimulus packages to jump-start their economies, and that a global recovery could take longer, perhaps pushing into 2010.

Analysts are particularly concerned about the slowdown in China and the recession in Europe. There is mounting concern about the stability of the euro and the British pound, which dropped to a 24-year low against the dollar Friday. Analysts are fretting about the possibility of a debt default in a euro-zone country that could send fresh shock waves through global financial markets.

The problems in Europe now appear to be as bad if not worse than those in the United States. In the last quarter of 2008, the British economy shrank at an annualized rate of 6 percent. That is worse than economists expected, but also showed the British recession may be even harsher than the one in the United States, where analysts predict data expected next week will show the U.S. economy to have contracted between 5 percent and 5.5 percent in the last quarter of 2008.

"The question now is not how bad will 2009 be, but will we recover in 2010 and if we recover, will it only be anemic?" said Andrew Scott, professor of economics at the London Business School, adding that the housing bubble is bigger, consumer debt is higher and the speed of the slowdown faster than in previous recessions.

Partial data released in recent days by Germany, Europe's biggest economy, indicates its economy saw a major contraction in the last months of 2008, posting a 6 percent annualized drop, according to Howard Archer, chief Britain and European economist for IHS Global Insight in London.

That could get worse as problems mount in the European financial system. In recent days, major banks in Europe — including the Royal Bank of Scotland — reported surprisingly massive losses. European authorities are seen by some critics as falling behind the United States in dealing with distress in their financial sectors.

Standard & Poor's has downgraded Greek and Spanish bonds and warned that others, including Ireland's, may be next. The sense that some European countries are now riskier has driven up the borrowing costs for even large nations in the region, including Italy. That has made it harder for those countries to raise the vast sums needed to launch major stimulus packages aimed at economic recoveries.

Fast facts

Iceland elections

Facing serious health problems and an economic crisis, Prime Minister Geir Haarde called Friday for early national elections on May 9, making his government a dramatic victim of the financial calamity gripping much of the globe. The move was welcomed by opposition leaders who said the public still wants the government to resign immediately. The economic collapse has brought the formerly tranquil, affluent island nation to the brink of ruin.

Economy shrinks rapidly in Britain, Germany 01/23/09 [Last modified: Friday, January 23, 2009 11:05pm]
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