Economy shrinks more than expected

LONDON (Reuters) - The economy shrank more than expected and for the first time in 16 years in the third quarter of 2008, as fears grow the country could be in for a painful and prolonged recession.

The Office for National Statistics said on Friday gross domestic product fell 0.5 percent in the three months to September, the biggest drop since Q4 1990 and the first contraction since Q2 1992.

Analysts had forecast a fall of 0.2 percent. On the year, GDP was 0.3 percent higher, the weakest rate of growth since Q2 1992.

The figures are likely to boost expectations that another hefty interest rate cut is on the way in November to shore up the economy after the Bank of England cut rates by 50 basis points to 4.5 percent in an emergency move earlier this month.

"We've had some quite deep and severe recessions in the UK before, and hopefully we can avoid that sort of situation in the current circumstances -- but the risks of that have increased," Bank policymaker Andrew Sentance said in a radio interview just before the figures were released.

All sectors of the economy posted declines on the quarter apart from agriculture, which makes up 1 percent of GDP, and government, which makes up about 23 percent of GDP.

No longer will Prime Minister Gordon Brown be able to boast that the economy has grown continuously since his Labour Party came to power in 1997.

He admitted on Wednesday that the economy was now in danger of falling into recession, normally defined as two consecutive quarters of negative growth.

His comments echoed a warning from Bank of England Governor Mervyn King that a recession was likely.