August 24, 2012 / 8:51 AM / 5 years ago

Recession shallower than thought despite trade drag

Shoppers hold umbrellas as they walk under London Olympic 2012 banners in Oxford Street in central London July 18, 2012.Toby Melville

LONDON (Reuters) - Britain's economy shrank less than first thought in the second quarter despite a hefty drag from trade, but the wider picture of economic weakness was little changed, data on Friday showed.

Second quarter output fell 0.5 percent, compared to an initial estimate of 0.7 percent, depressed by one-off factors including unusually wet weather and an extra public holiday to mark Queen Elizabeth's 60 years on the throne.

Economists expect a modest rebound from July but business surveys continue to paint a grim picture, keeping pressure on Chancellor George Osborne to find a tonic for growth and the Bank of England to provide more stimulus through lower interest rates or bond-buying.

The fall reported by the Office for National Statistics was still the biggest drop since the first quarter of 2009 - when the economy was hit by the immediate aftermath of the financial crisis.

"The headline is a bit less frightening but the bottom line is pretty much the same: the UK economy has shrunk for three consecutive quarters," said Vicky Redwood of Capital Economics.

"Given the drags from the fiscal squeeze, euro zone crisis and high domestic debt levels, we still doubt that a strong recovery lies ahead."

The pound fell to a two-week low against the euro and British debt prices rose, as some investors had bet on a bigger upward revision.

"DEEP-ROOTED PROBLEMS"

Smaller falls in construction and industrial output were behind the upward revision.

Consumer spending fell 0.4 on the quarter, while exports dropped 1.7 and imports rose 1.4 percent. Net trade shaved 1 percent off GDP, the biggest drag on growth from trade since the second quarter of 1998. A build-up in firms' inventories added 0.5 percent to GDP.

The economy slipped into its second recession in four years around the turn of the year as the ongoing euro zone debt crisis hurt exports and the uncertainty made businesses reluctant to invest.

There is also pressure from the government's austerity drive, and Friday's data showed that the second quarter was the first time since the third quarter of 2011 when government consumption did not rise.

"Britain is dealing with some very deep-rooted problems at home and a very serious debt crisis abroad, and that is why the healing of the economy is proving to be a slow and difficult process," a finance ministry spokesman said after the data.

Earlier this month the finance ministry and Bank of England launched a new scheme to offer banks cheap funding if they lend on to businesses and home-buyers at reduced rates, and further measures to support house-building are expected soon.

The central bank launched another round of quantitative easing asset purchases in July, buying 50 billion pounds of gilts to boost the economy, and most economists expect a further increase to the 375 billion total in November.

Reporting by David Milliken and Sven Egenter; editing by Patrick Graham

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