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By Christina Fincher and Fiona Shaikh
LONDON, March 27 (Reuters) - Britain's economy shrank even more abruptly than expected in the last three months of 2008 as construction output was revised sharply lower and firms ran down stocks at a record pace, official data showed on Friday.
While the fall in inventories should boost the recovery when it comes, few analysts expect any return to growth this year. The International Monetary Fund reckons Britain's economy will contract by 3.8 percent in 2009, its worst performance since the Second World War.
The Office for National Statistics' GDP data showed the economy shrank by 1.6 percent in the fourth quarter, the sharpest decline since 1980. Analysts had expected a reading of -1.5 percent, unchanged from the preliminary figure.
The annual rate of decline was revised down to 2.0 percent, the sharpest fall since 1991.
"The GDP contraction was depressingly even greater than previously thought," said Howard Archer, economist at IHS Global Insight.
The pound slipped after the figures, which reinforced fears that Britain would be one of the economies hardest hit by the global downturn.
Still, Britain is far from the only country whose economy floundered at the end of last year. Germany's economy shrank by 2.1 percent in the fourth quarter, its worst reading since reunification, Japan contracted by 3.2 percent, its worst performance since the oil crisis of 1974 and Ireland shrank by 7.1 percent, its sharpest contraction ever.
CONSTRUCTION COLLAPSE
Construction output in Britain slumped by 4.9 percent in the fourth quarter, the biggest quarterly fall in almost 20 years and a far sharper decline than the 1.1 percent drop initially estimated.
There was also evidence that the bleak economic climate was making Britons more thrifty. The household saving ratio jumped to 4.8 percent, it highest level in almost three years, from 1.7 percent in the previous quarter.
"Households have been helped by the cuts in interest rates and are reluctant to spend because of the economic climate," said Philip Shaw, economist at Investec.
The revised figures showed firms ran down inventories worth more than 4 billion pounds in the fourth quarter, almost twice the rate initially estimated, after a stock build-up of 1 billion pounds in Q3.
While this may have contributed to the downward revision to Q4 GDP, it bodes well for the outlook as firms will have to raise output more quickly when the recovery comes.
Separate figures showed Britain's current account deficit narrowed to 7.6 billion pounds in the fourth quarter of 2008 from an upwardly revised 8.2 billion pounds in the third.
The deficit was bigger than the 5.8 billion pounds analysts had forecast and reflected a decline in investment income as UK firms' earnings on overseas income fell sharply.
"The national accounts and balance of payments figures give a pretty gloomy picture of the state of the UK economy at the end of last year," said Jonathan Loynes at Capital Economics.
The Bank of England has cut interest rates to 0.5 percent and started pumping money into the economy in an attempt to kick-start a recovery. Still, its chief economist Spencer Dale said on Friday that, while he hoped growth would resume towards the end of the year, the risks were to the downside.
Most analysts do not expect the economy to recover until 2010 and expect growth, even then, to be anaemic.