LONDON (AP) — The British economy contracted by twice as much as economists had forecast in the second quarter, leaving it mired in recession and dashing recent hopes of an imminent recovery as premature.

Official figures released on Friday showed that the economy shrank by 0.8 percent between April and June amid a record fall in manufacturing output and declines in financial services.

While the contraction was much smaller than the 2.4 percent recorded in the first quarter of the year, it was more than double the 0.3 percent average expected by economists.

The British economy has now shrunk by 5.6 percent since the second quarter of last year, the biggest drop since quarterly records began in 1955.

“Recent hopes of recovery have run ahead of reality,” said Hetal Mehta, senior economic adviser to the Ernst & Young Item Club economic consultancy. “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.”

There had been signs in recent weeks that attempts by the Bank of England to spur growth — slashing interest rates to a record low of 0.5 percent and increasing the supply of money in the economy — were bearing fruit.

The British public and investors were cheered by a flurry of data showed a jump in retail sales, a strong rise in new homebuyer inquiries, a smaller than expected rise in jobless claims and a slowing rate of decline in manufacturing output.

Just two weeks ago, the British Chambers of Commerce reported solid improvements in confidence levels in its quarterly survey of 5,600 companies and said the worst of Britain’s recession was over.

That left Friday’s figures from the National Statistics Office delivering what IHS Global Insight economist Howard Archer termed “a really nasty and disappointing shock.”

The second-quarter growth figures were weighed down by the construction sector, which posted a 2.2 percent decline, putting it nearly 15 percent below the same quarter last year, the biggest year-on-year decline on record.

Although the overall figure may be revised as the Office for National Statistics gathers more data on the economy, it puts pressure on Treasury Chief Alistair Darling’s forecast of a return to growth by the end of this year.

The International Monetary Fund has forecast that Britain’s economy will not return to growth until next year, and then only at a weak level.

Vicky Redwood, economist at Capital Economics, said that the full-year fall in economic output could be as much as 4.5 percent.

The National Institute of Economic and Social Research, which has pegged this year’s drop in GDP at 4.3 percent, has suggested it will take another five years for income per head to return the level it was before the recession hit in early 2008.

Providing a bright spot on Friday was a report from the Society of Motor Manufacturers and Traders showing rising car production.

The society said that car production was down 30 percent from a year ago, but that was better than the 50 percent fall for the first six months of the year. Total vehicle production including commercial vehicles was down 34.5 percent in June.

source: yahoo Finance

Tags: global markets, recession recovery, uk economy

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