Page last updated at 15:25 GMT, Tuesday, 29 September 2009 16:25 UK

UK contraction less than thought

construction workers
Construction fell less than expected, boosting the economy

The rate of contraction of the UK economy in the three months from April to June has been reduced again.

Gross domestic product (GDP) fell by 0.6% compared with the previous quarter, better than the previous estimate of a 0.7% contraction.

The latest improvement came mostly from the manufacturing and construction sectors of the economy.

It suggests that the UK may see more signs of recovery, and possibly even growth, in the third quarter.

The original estimate produced had indicated a contraction of 0.8%.

GDP graph

The Office for National Statistics figures showed manufacturing fell 0.1% in the second quarter, which was half the amount previously estimated.

The rate of decline in construction was 0.8% instead of 2.2%, the ONS said.

Savings rise

ONS data also showed that people are saving more of their incomes than at any time in the past five years.

The household savings rate rose to 5.6% in the second quarter from 3.9% from the previous three months, its highest since 2003.

Stephanie Flanders
Stephanie Flanders, BBC economics editor

Coupled with other, more recent evidence, the GDP data adds to the view that the economy started growing again in the summer.

But the end of the recession does not necessarily spell a strong recovery. In fact, it reminds us that the economy could be battling headwinds for some time to come.

The rise in the household saving rate is a necessary - and welcome - adjustment. But obviously, that extra saving is money that isn't being spent in the shops.

There are also still only limited signs that the Bank of England's £175bn quantitative easing policy is reaching the broader economy. The Bank's preferred measure of the money supply rose by just 0.2% in August.

The BBC's economics editor Stephanie Flanders said that although this was a necessary and welcome adjustment, given the levels of personal debt seen in recent years, it could affect the strength of any recovery.

"Obviously, that extra saving is money that isn't being spent in the shops," she said.

Recovery hopes

Several other countries, including Germany and Japan, emerged from recession in the second quarter.

Chancellor Alistair Darling suggested this week that the UK was approaching the end of its recession.

"Germany, France and Japan are showing signs of growth. Many independent forecasters now believe the UK too is coming out of recession," Mr Darling said on Monday.

"I think it is too early to say so with total confidence. But I stick with my Budget prediction that, as long as we continue to support the economy, recovery will be underway in the UK by the turn of the year," he said at the Labour Party conference in Brighton.

The year-on-year decline in GDP remained at 5.5%. It was revised from a fall of 5.6% last month.

Economists had expected the annual rate of decline to rise to a 5.4% contraction.

'Slow recovery'

"There is some good news in the mass of UK data released today, but generally the figures highlight the fragility of the economic recovery," said Vicky Redwood, an economist at Capital Economics.

"It still looks likely to be a long, slow recovery."

Separately, the CBI employers' body said in its distributive trades survey that UK retail sales rose unexpectedly in September.

The survey's respondents were also optimistic that sales would continue to increase next month.

QE progress

The official data comes as the Bank of England met economists from the City to discuss its policy of adding money into the economy is working - known as quantitative easing (QE).

The Bank initially had the authority to create up to £150bn on the balance sheet and surprised many by increasing the amount by another £25bn in August.

"I think it's great that the Bank is doing this," said Colin Ellis, a former senior economist at the Bank who attended the meeting, told the BBC.

Mr Ellis declined to discuss the details of the meeting.

"There are massive uncertainties over QE still, but it was very useful for me to understand the Bank's thinking on this."

"I went in quite sceptical about QE, and that view hasn't changed," he added.

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