British Economy Contracts More Than Feared In Q2

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The British economic contraction in the second quarter was more than feared, but the pace eased compared to the first quarter, preliminary data revealed Friday.

Gross domestic product or GDP declined 0.8% quarter-on-quarter in the second quarter, after falling 2.4% in the first three months of the year, the Office for National Statistics said. Economists were looking for a 0.3% contraction.

"The decline in output was due to decreases in all component aggregate series," the ONS said.

Output in manufacturing was down 0.3%, compared with a 5.5% slump in the first quarter. Services output fell 0.6% after declining 1.6% in the previous quarter. Construction output decreased 2.2%, compared with a 6.9% fall in the previous quarter.

"Today's figures are the first glimmer of hope that our economy is re-balancing," said Steve Radley, chief economist at manufacturers' organization EEF.

The National Institute of Economic and Social Research recently predicted GDP to decline 0.1% in the third quarter of this year. However, it expects the economy to expand 0.5% in the fourth quarter.

Hetal Mehta, Senior Economic Adviser to the Ernst & Young ITEM Club said the second quarter numbers confirm that the worst of the recession is finally behind the U.K., but the fall in output was larger than expected given the stronger survey data of recent months.

"It does appear that recent hopes of recovery have run ahead of reality. 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," Mehta said.

To shore-up the economy that has been contracting since the second quarter of 2008, the Bank of England lowered its key interest rate to a record low of 0.5% and implemented an asset purchase scheme worth GBP 125 billion. According to minutes of the July monetary policy meeting, the rate-setting committee would keep the scale of the programme under review.

Given the second quarter weak performance of the economy, industry groups urged the Bank of England to continue stimulus measures.

"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," British Chambers of Commerce Chief Economist David Kern said.

In a meeting with global economists, Prime Minister Gordon Brown said Friday that while banks have now been stabilized, more work is needed to develop a strategy for a full return to growth.

The International Monetary Fund forecasts the British economy to shrink 4.2% this year, before returning to growth in 2010. The Ernst & Young ITEM Club recently forecast a 4.4% fall in GDP this year and then a growth of 0.5% in 2010.

Year-on-year, the GDP decreased 5.6% in the second quarter, the biggest fall since records began in 1955. It follows a 4.9% decline recorded for the first three months of the year. Economists expected 5.2% shrinkage.

The British economic contraction in the second quarter was more than feared, but the pace eased compared to the first quarter, preliminary data revealed Friday. (Market News Provided by RTTNews)