Page last updated at 10:38 GMT, Friday, 24 July 2009 11:38 UK

UK economy continues to contract

UK economic growth

The UK economy contracted 0.8% between April and June, more than double the figure economists had expected.

While an improvement on the previous quarter, the figures may indicate that the recovery could take longer than previously had been thought.

The contraction was much less than the 2.4% seen in the first quarter but was still above analysts' 0.3% prediction.

The latest figures take the annual rate of decline to 5.6%, the biggest fall since records began in 1955.

Liam Byrne, Chief Secretary to the Treasury, said that he was cautious but confident that growth was going to return at the end of the year.

"We are not out of the woods by any stretch of the imagination, but what today's figures show is that the pace of the downturn is easing," he said.

The BBC's economic editor Stephanie Flanders was less upbeat.

"Anyone who was worried about the momentum of the recovery before will be that much more concerned now," she observed.

"Not least, because the recovery has yet to actually show its face.

""t makes it that much less likely that the Treasury will hit its forecast for 2009 of a 3.5% decline overall. From where we are now, you would need growth of maybe 1.5% or more in both of the second quarters to make the numbers add up."

'Out of abyss'

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said that the data showed that hopes for a recovery had run ahead of reality.

The bottom line was that today's number is pretty dire, and a sharp wake-up call for anyone who had already been dreaming of recovery
Colin Ellis, Daiwa Securities

"With credit still severely restricted, consumers and businesses continuing to retrench and world trade yet to pick up, it is hard to see any grounds for sustained optimism at the moment," she said.

The decline in economic output was driven by business services and finances, a sector that has been hit hard by the financial crisis.

"We are clearly out of the abyss but still have a difficult time ahead," said Brian Hilliard, economist at Societe Generale.

Industry groups called on the Bank of England to continue its actions to stimulate the economy.

"There is no room for complacency and suggestions of suspending quantitative easing are misguided. It is important to persevere with an aggressive policy stimulus to ensure that the economic downturn does not worsen," said David Kern, chief economist at the British Chambers of Commerce.

An advisor to the central bank had suggested on Thursday that the Bank may put its asset purchasing on hold.

Harder to balance?

According to the Centre for Economic and Business Research (CEBR), the worse-than-expected figures make it unlikely that the Treasury will be able to meet its own economic forecasts.

In the Budget, the Treasury forecast the economy would decline by between 3.25% to 3.75% in 2009 and missing this target would make it harder for the Treasury to balance its books.

"For this to now happen would require a remarkable bounce back in the second half of the year with growth of around 1.5% of the remaining two quarters," said Richard Snook, senior economist at the CEBR.

"Weaker growth than the chancellor expects means that public sector net borrowing will exceed the £175 bn projected for the 2009/10 fiscal year," he added.

TUC General Secretary Brendan Barber warned against spending cuts to curb borrowing.

"They could tip the economy into an ever deeper downturn and make the deficit worse when the tax take falls and spending on unemployment goes up. With consumers and companies failing to spend, the public sector must fill the gap," he said.

The release is the ONS's earliest estimate of gross domestic product and the figure is often revised as data for the full three months is not yet available for every sector of the economy.

"The bottom line was that today's number is pretty dire, and a sharp wake-up call for anyone who had already been dreaming of recovery," said Colin Ellis at Daiwa Securities.

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