British economy shrinks less than feared

LONDON: The UK economy shrank slightly less than feared in the second quarter of this year, according to data released yesterday.

The Office for National Statistics bolstered hopes that the country will return to growth in the current quarter by reporting that the economy contracted by 0.7 per cent between April and June, not 0.8 per cent as previously estimated. It said that manufacturing, energy and wholesale sectors performed better than expected, adding that there was “anecdotal evidence” that the government’s car scrappage scheme has boosted the economy.

This means that the economy has shrunk by 5.5 per cent in the last year, not 5.6 per cent as previously calculated. This is still the biggest annual decline since records began in 1955, indicating that the government’s forecast of a contraction of around 3.5 per cent this year is still too optimistic.

The upwards revision came as a slight surprise to the City, London’s financial district. Some analysts had suggested that the GDP figure could be revised downwards after it emerged yesterday that business investment has suffered its worst fall in nearly a quarter of a century. The news helped the pound rise slightly against the dollar and euro.

Paul Robinson of Barclays Capital said the figures reinforced hopes that the UK economy has stopped shrinking and will grow in the third and fourth quarters of 2009.

George Buckley of Deutsche Bank said the GDP data still shows a steep contraction over the last year, but predicted there could be a “bounce in the second half” of 2009 as many companies have run down their inventory levels and will need to restock. The data shows that construction and services sectors’ outputs suffered their largest falls since they were first recorded.

That showed a recovery would be based on fragile foundations, warned Vicky Redwood of Capital Economics. She added that today’s revision was insignificant when set against the near-6 per cent drop in output seen during this recession. “With tax rises looming, labour market weakening and credit conditions tight, recovery in private sector demand will be weak. We continue to expect a pretty minimal rise in GDP next year,” she said.