The British economy shrank in the first quarter at its sharpest rate since the early days of Margaret Thatcher's government 30 years ago as the financial crisis continued to wreak havoc on banks, retailing and manufacturing.

In its first estimate for the January-March period, the Office for National Statistics said Friday that gross domestic product, or GDP, contracted by a massive 1.9 per cent from the previous three-month period, the biggest drop since 2.4 per cent posted in the third quarter of 1979.

That was far more than the 1.6 per cent decline posted in the fourth quarter of 2008 and above analysts' expectations for a more modest 1.4 per cent drop.

The latest decline means Britain's economy has shrunk for three consecutive quarters, and there are few indications that things will improve in the near future.

Compared to a year ago, Britain's GDP was 6.2 per cent lower in the first quarter, compared to the 4.9 per cent year-on-year decline in the fourth quarter of 2008.

Earlier this week, the British government laid out hope the economy will start to grow towards the end of this year, but still forecast that output this year will shrink by a post-Second World War record of 3.5 per cent.

The average postwar recession in Britain has lasted for around 15 months, which would, if replicated during this current downturn, mean that the economy will continue contracting until the autumn of this year. However, most economists think that this recession will last longer, and possibly last well into 2010.

"It's early days yet, but the drop opens up the possibility of GDP in 2009 as a whole falling by even more than the four per cent we currently expect," said Vicky Redwood, economist at Capital Economics.

IMF predicts Britain's output will contract

According to the International Monetary Fund's latest forecasts, Britain would likely be one of the worst-hit economies because of its dependence on the housing and financial sectors. The IMF is projecting that Britain's output will contract by 4.1 per cent this year, much more than its previous forecast of a 2.8 per cent decline.

A more detailed look at the figures shows that the weakness in the economy was broad-based, with both services and manufacturing output sharply down in the wake of the banking crisis, the seizing up of lending and already-confirmed recessions around the world, from the U.S. to Germany and Japan.

In a separate release, the statistics office did post some moderately good news. It said retail sales during March rose by a monthly 0.3 per cent, primarily because of higher food sales.

The rise offered some cheer for the retail sector after grim figures for February revealed a worse-than-expected 1.9 per cent plunge in sales.