U.K. Economy Falls at Fastest Pace Since 1979

Laurence Norman and Joe Parkinson LONDON -- A report Friday showing that the U.K. economy fell at its fastest rate in 30 years in the first quarter added to doubts on the economic outlook contained in the government's recent budget. The economy contracted by a greater-than-expected 1.9% in the first quarter from the previous three months and by 4.1% from a year earlier, the Office for National Statistics said Friday. The data marked a third straight quarter of output declines in an increasingly harsh recession. The quarterly contraction was the biggest since the third quarter of 1979, while the annual output fall was the biggest since 1980. GDP fell a quarterly 1.6% in the final three months of 2008. A Dow Jones Newswires survey Friday had predicted output in the first quarter would shrink 1.4% from the previous quarter and 3.7% from a year earlier. The news put further pressure on the pound in foreign exchange trading, where fears of a possible ratings downgrade of U.K. government debt had already begun pushing down the currency in Asian markets. The pound opened London trading at $1.4660 after a close of $1.4740 in New York. The GDP release brought sterling down to $1.4598 by mid-morning. Ratings agency Standard & Poor's said Friday that its analysts are examining the details of the budget presented by U.K. Chancellor of the Exchequer Alistair Darling Wednesday. A spokesman for the agency said it had no comment on how the budget would affect the government's triple-A credit rating. "Ratings are always under review," the S&P spokesman said. "This is not a formal process but simply in the sense that we are always monitoring the situation for all credits." Immediately following the budget Wednesday, Moody's Investors Service said the government's credit rating is still triple-A, but a longer-than-forecast period of high public debt could be a "cause for concern" and would have "rating implications over time." Moody's Friday said the U.K.'s credit rating wasn't under review for a downgrade, refuting speculation in financial markets. The U.K. economy has now contracted by a total of 4.1% since the start of the recession in the third quarter of 2008. This is the first time since records began in 1948 that the economy has shrunk by more than 1% in two straight quarters. James Knightley, U.K. economist at ING, said Friday's GDP release "does again highlight how optimistic Chancellor Darling was in his budget assumptions and that the risk to the fiscal deficit remains heavily to the upside." In Wednesday's budget statement, Mr. Darling predicted the economy would contract by 3.5% in 2009. However, he forecast growth of 1.2% in 2010 and an output expansion of 3.5% in 2011. The declines in first-quarter output were broad-based. Total production output fell 5.5% on the quarter, compared with a 4.5% decline in the fourth quarter. "Looking ahead, the best we can say is that the pace of economic decline may slow in the coming months," said the Confederation of British Industry, the country's leading business lobby. "Given that unemployment will continue rising sharply, even if businesses begin to see the rate of decline in activity starting to ease, consumers are likely to feel anxious about job prospects." In other news Friday, U.K. retail sales ticked up in March in line with expectations, as consumers continued to show resilience in the face of the deepening recession. Seasonally adjusted retail sales rose 0.3% on the month after a downwardly revised 2.0% fall in February, the statistics office said. In annual terms, retail sales rose 1.5%, following an unrevised 0.4% gain in February. "Today's numbers reflect a relative resilience in one part of consumption -- but not all of it," said Colin Ellis, an economist at Daiwa Securities. —Paul Hannon contributed to this article.