UK economy shrinks 0.8%

Britain's economy shrank more than twice as fast as expected in the second quarter of 2009 to register its biggest annual decline on record, dashing hopes of a speedy recovery from the worst recession in nearly 30 years.

GDP fell 0.8 per cent in the three months to June and by 5.6 per cent lower on the year, the steepest yearly fall since similar records began in 1955, official data showed on Friday as Britain became the first G7 country to report Q2 data.

"These are awful, awful numbers," said Ross Walker, UK economist at RBS Financial Markets. "It casts doubt on whether we will actually see growth in Q3."

Many analysts had been confident of a return to growth later this year and sterling fell more than half a cent and gilt prices rose as investors bet the recovery could take longer and the Bank of England might add more stimulus to the economy.

"We would still tend to the view that the economy will expand in the second half of the year but these figures introduce some uncertainty to that outlook," said Philip Shaw, chief economist at Investec.

The UK economy has now shrunk for five consecutive quarters with a cumulative decline of 5.7 per cent - more than double the drop seen in the early 1990s recession and not far off the 6.0 per cent contraction experienced in early 1980s.

Analysts said government forecasts of the economy shrinking by around 3.5 percent this year - which would be the worst outturn since the Second World War - were looking very optimistic, putting more pressure on strained public finances.

"For this to now happen would require a remarkable bounce-back in the second half of the year with growth of around 1.5 percent in each of the remaining two quarters," said Richard Snook, senior economist at the Centre of Economic and Business Research.

Treasury minister Liam Byrne said that at least the figures showed the pace of decline was easing - GDP shrank by 2.4 percent in the first quarter - and that he was "cautious but confident that growth will return towards the end of the year."

ELECTION WOES

Prime Minister Gordon Brown desperately needs an economic turnaround before an election expected in May 2010 as his Labour Party is languishing in the polls.

But analysts warned that even if the economy starts to grow again, it may be a while before it picks up any real momentum and hundreds of thousands jobs could still disappear as more and more companies struggle to make ends meet.

A breakdown of the figures showed business services and finances, a sector that has boomed for much of the last decade, accounted for more than a quarter of the Q2 GDP decline.

"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," said Hetal Mehta, senior economic adviser to Ernst and Young.

The Bank of England has already cut interest rates to a record low of 0.5 percent and has pumped close to 125 billion pounds of new money into the economy in order to pull the country out of recession and get lending going again.

Policymakers will now debate next month whether even more stimulus is needed. The jury remains out on whether the BoE will choose to expand the scope of its asset-buying programme of mostly gilts when the £125 billion total is completed.

"It is still likely to be a long hard slog to get the economy back on track. Accordingly, we think that it is premature to conclude that the BoE's quantitative easing programme has already come to an end," said Vicky Redwood, UK economist at Capital Economics.