By Brian Swint and Jennifer Ryan Oct. 23 (Bloomberg) -- Britain’s failure to escape the worst recession since World War II may force the Bank of England to increase its bond-purchase plan next month, economists said. Seven months after Governor Mervyn King’s central bank started a 175 billion-pound ($287 billion) program to rescue the economy, the Office for National Statistics said today gross domestic product unexpectedly shrank 0.4 percent in the third quarter. None of the 33 economists surveyed by Bloomberg predicted a contraction. “Having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery,” said Stephen King, chief global economist at HSBC Holdings Plc, in an interview with Bloomberg Television today. “They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.” Britain is still mired in recession even after pledges of about one trillion pounds in stimulus and banking aid from the Bank of England and Prime Minister Gordon Brown. King, whose push to expand bond purchases to 200 billion pounds in August was defeated, may win more support at the next Bank of England decision on Nov. 5. The yield on the two-year gilt declined 6 basis points to 0.87 percent today. The 10-year gilt yield slipped 4 basis points to 3.66 percent. The pound dropped 1.5 percent after the report and traded at $1.6376 as of 12:56 p.m. in London. Debate JPMorgan Chase & Co. economist Malcolm Barr raised his forecast for the Bank of England to extend its bond-purchase program to 225 billion pounds in November after today’s report. He previously forecast an increase to 200 billion pounds. Officials and economists are debating the success of so- called quantitative easing, which aims to boost money supply and spending by flooding banks with cash through bond purchases. Bank of England Deputy Governor Charles Bean said Oct. 13 that rising asset prices suggest it’s had a “significant” impact and signaled optimism the economy had troughed. At the same time, policy makers refuse to estimate the exact link between bond purchases and spending. Money supply increased as the slowest annual pace in more than a year last month. The GDP figures “reopen a serious possibility that the Monetary Policy Committee increases its QE target,” said Philip Shaw, chief economist at Investec Securities in London, in a note titled “Champagne Corks Go Back Into Bottles.” Optimism Dashed The prolonged slump dashes optimism that the U.K. is poised to follow the U.S., Germany and France out of recession and adds to Brown’s woes as he struggles to cement a recovery in time for a general election due by June. Recent reports had shown London home sellers raised asking prices to a record high this month and the pound’s 8 percent slide against the euro since June had made U.K. executives the most optimistic about exports in more than a decade. Services industries, which account for 76 percent of the economy, shrank 0.2 percent on the quarter and the drop was led by distribution, hotels and catering, followed by transport, storage and communication, and business services and finance. Industrial production shrank 0.7 percent as manufacturing contracted 0.2 percent, the statistics office said. Construction slumped 1.1 percent. Some economists said the Bank of England should pay more attention to signs of growth and pointed that today’s figure was a preliminary estimate that could be revised to show growth. ‘No Need’ “There is no need to accelerate the quantitative easing,” said former policy maker DeAnne Julius in an interview. “The economy is turning around and it’s hard to say that it’s had much impact. What has had an impact is the very low rates.” Chancellor of the Exchequer Alistair Darling said he’s sticking to his forecasts for growth this year and some analysts said the economy may be doing better than today’s figures show. Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam, said the U.K. central bank may still hold fire next month because there are concerns that continuing to buy assets may lay the ground for future speculative bubbles. “It’s now clearly a closer call,” said Kounis, a former U.K. Treasury official. Some analysts expressed frustration at how hard it is to work out what’s going on in the economy. “It seems to me inconceivable that the recession is deepening and the housing market is recovering,” said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official. “The last refuge of the failed forecaster is to challenge the statistics, but that’s what I’m left with.”

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