British industrial production fell sharply in January, official figures showed Tuesday, raising fears that the country will suffer its third recession in not much more than four years.
The Office for National Statistics said industrial production dropped a monthly rate of 1.2 percent from December, in contrast to expectations for a 0.2 percent rise. Industrial output includes manufacturing, as well as sectors such as construction and oil and gas production, and accounts for around 20 percent of the British economy, which is Europe's third-largest.
The pound fell sharply on the news as traders think it's more likely now that the Bank of England will back another monetary stimulus in the months ahead. At one point, the pound fell to $1.4830, its lowest level since June 2010, from $1.4905 just before the figures were released. It has since settled around the $1.4860 mark.
The industrial figures are the latest in a series of downbeat indicators suggesting that Britain's gross domestic product, or GDP, may shrink again in the first quarter of 2013. If it does so, the country would be in its third recession, defined as two consecutive quarters of economic contraction, since the end of 2008.
"Overall, a dire set of U.K. data," said Ross Walker, an economist at the Royal Bank of Scotland. "The slump in industrial production in January leaves a decline in Q1 GDP looking more likely than not."
That's the gloomy backdrop to next week's annual budget statement from the government. However, given the country's continuing high borrowing levels and the government's primary debt reduction policy stance, Treasury chief George Osborne is thought to have little room to raise spending or cut taxes.
As a result, much of the burden to revive the ailing British economy has fallen on the Bank of England. In an effort to stimulate growth in the wake of the financial crisis, the central bank has kept its key interest rate at a record low 0.5 percent since March 2009 and pursued a monetary stimulus program.
But so far, government cutbacks, financial troubles among key trading partners in Europe and difficulties in restructuring the banking industry have held Britain back.
Over the past few months, the Bank of England has held off from boosting its stimulus program — under which it buys government bonds from banks to increase the amount of money flowing through the economy — in the hope the economy will recover on its own. Above-target inflation has also been a concern.
"The data will pile more pressure on the Bank of England to inject more stimulus into the economy at its next policy meeting, and on (Osborne) to accept that more needs to be done to boost growth in next week's budget," said Chris Williamson, chief economist at Markit.