Jan. 9 (Bloomberg) -- Jane Casulli has been selling coffee and sandwiches in London’s financial district for 10 years and survived the dot-com bust. She says this meltdown is different.

Sales at her cafe, a two-minute walk from the local offices of Swiss investment bank UBS AG, plunged 50 percent in the last two months of 2008, and some regulars are requesting monthly tabs to cover their morning lattes.

“Customers are now asking how much things cost and bringing sandwiches from home,” she says. “People aren’t leaving their offices. Every day looks like a Sunday.”

The U.K. economy may shrink more than those of the U.S., Japan and euro region in 2009 after rising house prices and easy credit led Britons to run up 1.44 trillion pounds ($2.18 trillion) of debt, making them among the world’s biggest borrowers. The country’s gross domestic product may contract by 2.9 percent this year, with as many as 2 million people claiming unemployment benefits, the Centre for Economics and Business Research, a London-based study group, said.

“What we’re seeing is a very, very serious economic decline,” said Ian Barlow, a senior partner at accounting firm KPMG LLP and chairman of London’s overseas investment agency. “The job reductions are clocking up weekly, and bankruptcies are bound to shoot up.”

The U.K. capital may lose almost 107,000 jobs by the end of 2010, according to research firm Oxford Economics. Banking, finance and insurance, which employed about 315,000 people in London last year, may cut more than 60,000 positions as a result of the credit crisis.

‘Frozen With Fear’

London contributes 18.4 billion pounds annually toward the U.K.’s public finances, or about one-fifth of total revenue, according to a study by the London School of Economics. That’s likely to drop as banks post lower earnings.

The bonus pool for bankers will slump by more than 50 percent this year from 3.6 billion pounds in 2008, according to the CEBR. They received a record 8.5 billion pounds for 2007.

The prospect of a shrinking customer base has halted plans to expand Fox & Co., a men’s clothing and accessories store a few blocks from the Bank of England. The shop, which opened in 1868, is struggling to sell brown leather briefcases priced at 800 pounds and umbrellas for 275 pounds.

“People are frozen with fear. They are still spending but much more cautiously,” said co-owner Michael Dreher. “It’s survival of the fittest.”

Surging Debt

As Britain’s 15-year economic boom ended, consumer debt rose 7.3 percent last year, amassed through mortgages, loans and credit cards, and now exceeds the country’s annual GDP.

In Germany, household debt amounts to 63.5 percent of GDP and in France it accounts for about half the country’s annual output, according to the latest figures from Eurostat, the Luxembourg-based agency that collects EU statistics.

As the credit crunch makes borrowing more expensive, consumers risk falling deeper into debt, according to Malcolm Hurlston, chairman of the Consumer Credit Counseling Service, which offers borrowers advice.

The agency received 9,000 telephone calls during one week in November -- the busiest period since the service began in 1993.

“In the last few months, credit-card debt has come up remarkably,” Hurlston said. “It’s the easiest form of credit to access to pay for essentials.”

Bankruptcies

Personal insolvency cases probably surged 20 percent to about 120,000 in 2008, according to Mike Gerrard, a bankruptcy specialist at Grant Thornton U.K. LLP in London. That’s up fivefold from the 24,000 recorded in 1997.

“Given the way the economy deteriorated in the last three months of 2008, this year could be a pretty bad one for personal insolvencies,” he said.

To combat the recession, Chancellor of the Exchequer Alistair Darling proposed the biggest fiscal stimulus in two decades Nov. 24. The plans for tax cuts and spending will add 20 billion pounds to the economy between now and April 2010. The government will also speed up 3 billion pounds of spending on infrastructure projects such as roads, schools and housing in an attempt to reinvigorate the economy.

Shrinking bonuses and rising unemployment have pushed Britain into a budget deficit of 37 billion pounds as of November, data from the Office for National Statistics show.

In an attempt to jump-start the economy, the Bank of England also cut the benchmark interest rate to 1.5 percent yesterday, the lowest since the central bank was founded in 1694.

Olympic Regret

The chancellor’s initiatives are “too little, too late” for small and medium-size business, said Stephen Quest, corporate tax partner at Grant Thornton.

Some government-funded projects, including the 2012 Olympics, the upgrade of the London Underground and a new east- west railway, are already under pressure to curb costs, said Tony Travers, a government professor at LSE.

Olympics Minister Tessa Jowell said in a November speech that the U.K. wouldn’t have bid in 2005 to host the games “had we known what we know now.”

For many consumers, the most tangible help the government is offering is a temporary, 2.5 percentage point reduction in the 17.5 percent sales tax. At Jane Casulli’s cafe, that cuts the price of a latte by 5 pence to 2.05 pounds.

Casulli says she won’t charge more to cover higher prices for basics like sandwich meat, which “shot up” last year.

“You can’t very well put up the price of a sandwich in this environment, can you?” she said. “People literally haven’t got money in their pockets.”

To contact the reporter on this story: Brian Lysaght in London at blysaght@bloomberg.net; Poppy Trowbridge in London at ptrowbridge@bloomberg.net.

Last Updated: January 8, 2009 19:05 EST