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Chancellor of the Exchequer Alistair Darling suggested he may have to scale back predictions of economic recovery later this year, acknowledging that Britain’s recession is deeper than expected.

“We did expect to be a significant downturn, indeed we have seen that,” Darling said in London today. “It is undoubtedly sharper than many people believed, partly because you have seen industrial production go down because of exports.”

The economy contracted at its fastest pace since 1980 in the fourth quarter, pushing the U.K. into recession. The pound dropped to a 23-year low against the dollar, and stocks touched a two-month low. Darling predicted in November that the economy will begin to recover in the second half of this year.

Darling and Prime Minister Gordon Brown said they are working to revive the economy and that the elements for recovery already are in place. The comments were aimed at reassuring investors and voters, who are switching their support to David Cameron’s Conservative Party.

“We’re fighting this recession with every weapon at our disposal,” Brown said on BBC Radio 4 today. “We are building the foundation stones of a recovery plan.”

Treasury Forecasts

Darling in November predicted the U.K. economy will shrink by as much as 1.25 percent this year, the most since 1991. That contrasts with a European Commission forecast that the U.K. will contract 2.8 percent this year, the most since 1946. The economy grew 0.7 percent in 2008, the least since 1992.

“This sets a very weak starting point for growth this year,” said Vicky Redwood, U.K. economist at Capital Economics in London. “We already expected GDP to shrink by 2.5 percent this year, but the contraction now looks set to be closer to 3 percent.”

The Bank of England has slashed interest rates while the Treasury cut taxes, pumped 37 billion pounds to rebuild banks’ capital bases and offered more than 500 billion pounds in loan guarantees and other measures to revive markets.

Six polls published this year show Brown’s Labour Party trailing further behind the Conservatives than in December, when Brown narrowed the gap to as little as one percentage point.

Second Rescue

Brown pledged Jan payday loans. 19 to extend the bank rescue announced last year and boost the government’s stake in Royal Bank of Scotland Group Plc to 70 percent. RBS may post an annual loss of 28 billion pounds ($39 billion), the biggest in British corporate history.

The Conservatives, who supported Brown’s first bank bailout plan in October, have become increasingly critical of the government, suggesting ministers don’t grasp the severity of the downturn and that Brown is borrowing recklessly.

“It’s difficult to see how we’ll get that confidence with a prime minister who blames everyone else for the mess we’re in and refuses to acknowledge any mistakes,” said George Osborne, the Conservative lawmaker who speaks on Treasury matters.

Brown, who blames the crisis on international problems, says other countries need to take similar steps for the measures to affect the U.K. economy. Asked how long the recession will last, Brown replied that “it depends on the degree of international cooperation.”

“He’s right there is a big global recession, but there is also a domestic problem produced by failure of policy in the U.K.,” said Vince Cable, the Liberal Democrat lawmaker in charge of economic policy. “We had a boom in house prices, which the government let get out of control.”

Obama’s Plan

Brown said U.S. President Barack Obama will unveil a “major, major stimulus package” to spur the economy this week and other European countries will also follow with their own measures. He urged China to do more to stimulate domestic demand.

Brown also attacked comments by Jim Rogers, chairman of Singapore-based Rogers Holdings, who this week urged investors to “sell any sterling you might have” say the U.K. economy is “finished.”

“If you think we are going to build our policy around the comments of a few speculators who want to make money out of Britain, then you are very, very wrong indeed,” Brown said. “The decisions we make, are based around what is right for Britain.”

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