End of the downturn in sight at last as stimulus takes effect

House prices also rising but concerns remain over recovery's strength and jobs

Hopes that the recession is finally coming to an end were given another boost yesterday when official figures were released showing that Britain's economy performed better in the second quarter than had been thought.

The Office for National Statistics said the economy contracted by 0.7 per cent, against its original estimate of 0.8 per cent. Some had feared a downward revision based on Thursday's poor figures for business investment, which showed a second-quarter fall of 18.4 per cent. The annual figure was also revised upwards to show a 5.5 per cent fall, compared with 5.6 per cent, although that is still the biggest annual contraction since records began in 1955.

A further sign of recovery was provided by the Land Registry, which said that house prices in July rose at the fastest rate in five years. The average price of a home in Britain increased by 1.7 per cent to £155,885. It is the latest in a steady stream of data suggesting that the housing market is showing sustained improvement, and follows a similar assessment from Nationwide Building Society earlier in the week.

The revision to the GDP figure was fuelled by an increase in estimates for the manufacturing, energy, wholesale and motor vehicles sectors. The ONS also said there had been anecdotal evidence that the Government's scrappage scheme is helping the motor industry. Economists saw further signs of optimism from a continued fall in inventories – raw materials held by manufacturers or stock held by retailers.

George Buckley, economist at Deutsche Bank, said: "It will still take a while until we get back to something normal but the one really positive thing is that inventories are still falling quite sharply. That is good news because production will have to increase to build them back up in recovery. We could see a bounce back in the second half."

Mr Buckley expects the UK economy to grow by 0.2 per cent in the current quarter, followed by a 0.5 per cent rise in the final quarter. That is similar to the Bank of England's own forecasts – extrapolating from figures in its recent Inflation Report suggest that it expects growth of 0.1 per cent followed by 0.5 per cent. On Monday the Institute of Chartered Accounts in England & Wales reported a record rise in confidence among professionals, and said it expected third-quarter growth of as much as 0.5 per cent as a result.

David Raistrick, UK manufacturing leader at Deloitte, said the ONS figures demonstrated how the upturn in the manufacturing and automotive sectors is contributing to a recovery in the UK. "While both the sectors still face very challenging environments, recent reports suggest that the industries may have passed the worst," he said.

David Kern, chief economist at the British Chambers of Commerce, said: "After this week's poor business investment figures, the GDP revision comes as a slight relief. However ... the productive sector of the economy is still very weak, and the Government must manage the task of repairing our public finances without damaging wealth-creating businesses."

The 0.7 per cent fall is a marked improvement on the second quarter's 2.4 per cent contraction, but still leaves Britain lagging behind Germany, France and Japan, which have all returned to growth. The data also confirmed that construction output suffered its biggest annual fall since records began in 1948. At the same time, the fall in annual services sector output was the biggest since records began in 1955. Gross fixed capital formation suffered its biggest quarterly fall since 1991.

A further a note of caution was sounded by the recruitment consultancy Robert Walters, which slipped into the red with a first-half loss of £2.6m against a profit of £9.8m in the previous half. A downbeat chief executive Robert Walters said: "I personally think we have another year or so of pain. I'm not an economist, but what I'm working on is quite a few years in the recruitment industry. We are planning on the basis that it is not recovery time yet."