Recession shallower than expected

LONDON Fri Sep 28, 2012 7:21am BST

LONDON (Reuters) - Britain's economy contracted less than thought during the second quarter, offering a higher base for an expected return to tepid growth and lifting the pound while supporting share prices.

Other data showed Britain's financial position worsened, although economists said the biggest current account deficit on record was partly because of lower returns on investments in the crisis-hit euro zone.

The Office for National Statistics said on Thursday gross domestic product fell 0.4 percent in the three months from April to June compared with the first quarter.

The ONS had previously estimated the fall at 0.5 percent and economists had expected that rate to be unrevised.

Year-on-year, GDP was 0.5 percent down, in line with forecasts and the previous ONS estimate.

The economy has not fully recovered output lost during the financial crisis. It slipped back into recession, according to ONS data, in the final quarter of 2011 as the euro zone debt crisis and British government austerity weighed on output.

"The UK still has a tough job in developing significant sustainable growth, given tighter fiscal policy, still-significant pressures on consumers and soft global growth," IHS Global Insight economist Howard Archer said.

"More stimulus from the Bank of England remains highly likely in the fourth quarter," he said.

The latest data brought GDP more in line with less downbeat business surveys, economists said. Stripping out the hit from the extra public holiday to celebrate the Queen's Diamond Jubilee, the economy may have even eked out some growth.

A surge in manufacturing, solid retail sales and improving business surveys point to solid growth in the third quarter, when ticket sales for the London Olympics and a recovery of the output lost due to the extra holiday will boost GDP.

BoE policymaker Paul Fisher said in a newspaper interview the economy was almost certain to bounce back during the current quarter with "a very strong gross domestic product number".

Nonetheless, most economists expected the central bank would extend its asset purchases in November, when it has completed its current 50 billion pound round of government bond buybacks, as the economy remains fragile and dangers from the euro zone crisis loom large.

A meaningful recovery remains elusive despite a string of government measures to unblock lending to businesses and consumers, with a Reuters poll finding a consensus forecast for 1.2 percent GDP growth next year after a drop in 2012.

INCOME RISE

A 3.0 percent fall in construction output remained the main drag on the economy in the second quarter.

Household spending fell 0.2 percent, but real disposable income rose 1.9 percent, the sharpest increase in three years. The savings ratio increased to 6.7 percent from 6.0 percent in the first three months of 2012.

The government and Bank of England hope falling inflation will provide cash-strapped households with more money to spend and boost consumption.

The BoE said British banks should take advantage of any lull in euro zone turmoil to tap markets for fresh capital to bolster their defences.

Second-quarter current account data showed Britain's deficit with the rest of the world jumped to a record high 20.8 billion pounds, or 5.4 percent of GDP, as investment income and goods exports slumped.

"The latest deterioration can be pinned on developments in the euro area's sovereign debt crisis," Nomura economist Philip Rush said. "The poor relative return on the holdings of UK residents in the euro area has been a growing weight on the UK's net external position."

(Additional reporting by Olesya Dmitracova, David Milliken and Huw Jones; Editing by Toby Chopra and Dan Lalor)

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