The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain yesterday 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 yesterday. 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 and 5.5 percent in the last quarter of 2008.
The meltdown is altering high streets in Britain, where retail icon Woolworths shuttered the last of its 807 branches this month after 99 years in business. Marks & Spencer, sometimes described as the bellwether of Britain's retail sector, said this month that it would close 27 stores and cut more than 1,000 jobs. The average price of a house has plummeted to mid-2004 levels, according to Halifax, Britain's biggest mortgage lender. Car sales are at a 12-year low. The number of people out of work has climbed to nearly 2 million, a level not seen since 1997 when the Labor Party came to power.
'Will we recover in 2010?'
In fact, the only sector to show growth in Britain was agriculture, which accounts for about 1 percent of the overall economy.
"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 single 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 Americans in dealing with distress in the 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 more risky 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.
Also troubling are signs that China, once a rare light in the global economy, may not prove to be the pillar of strength in Asia that many analysts had hoped. Beijing announced this week that its economy grew by 6.8 percent in the fourth quarter of 2008 — slower than the 7 percent analysts expected — bringing total growth for 2008 to a seven-year low. Chinese data, however, are somewhat opaque, and analysts warned the slowdown there may be sharper than Beijing is willing to admit.
That is diminishing hopes for China as Asia's economic white knight, with its growth potentially propping up economies in the region. And as China grows at a far slower rate, it is importing fewer goods from neighbors, giving export-dependent nations in the region no way to pick up the slack from plummeting demand in the United States and Europe.
Particularly hard hit is South Korea, which saw trade with China soar in recent years. But as China slows, and the United States, Europe and Japan sink into deep recessions, unsold goods are piling up at South Korea docks. This week, the government said the economy in the fourth quarter staged its sharpest drop since the Asian economic crisis swept across the country in 1998.
Special correspondent Karla Adam in London contributed to this report.