Economy shrinks much more than expected

Clouds are reflected in buildings at the financial district of Canary Wharf in London in a January 23, 2009 file photo.

LONDON (Reuters) - The economy shrank more than twice as fast as expected in the second quarter to register its biggest annual decline since comparable records began in 1955, official data showed on Friday.

The Office for National Statistics said GDP fell by 0.8 percent on the quarter, taking the annual decline to 5.6 percent. Analysts had forecast a quarterly decline of just 0.3 percent after a hefty 2.4 percent drop in the first quarter.

"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 and policymakers had been confident of a return to growth in the second half of the year. But sterling fell around half a cent against the dollar and gilts rose as investors bet the recovery could take longer and the Bank of England could yet add more stimulus to the economy.

The Bank of England has already cut interest rates to a record low and is close to completing a 125 billion pound quantitative easing programme and has said it will consider whether or not to expand the programme at its August policy meeting.

Britain is the first major economy to report Q2 GDP figures and the weaker-than-expected figures may raise doubts over how quickly the global economy will recover after the worst financial crisis in decades.

The UK economy has now shrunk for five consecutive quarters with a cumulative decline of 5.7 percent. That is more than double the drop seen in the recession of the early 1990s and not

far off the 6.4 percent contraction experienced in the recession of the early 1980s.

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 GDP decline in the second quarter.

Overall, services fell by 0.6 percent on the quarter and by 3.8 percent on the year.

(UK Economics Desk, uk.economics@reuters.com, Tel: 44 207 542 7748; Editing by Victoria Main))