U.K. Economy Shrank by 0.8% in the Second Quarter

The U.K. economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in recession.

Gross domestic product contracted 0.8 percent from the first quarter, the Office for National Statistics said today in London. Economists predicted a 0.3 percent drop, according to the median of 32 forecasts in a Bloomberg News survey. From a year earlier, the economy shrank 5.6 percent, the most since records began in 1955.

Prime Minister Gordon Brown’s Labour Party trails the opposition Conservatives in polls less than a year before an election as the recession drives up unemployment. Bank of England policy maker Andrew Sentance said yesterday that the British economy may start to pick up in the second half of the year.

“It’s a very sizeable recession indeed,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “I think we’ve seen the worst, but what will the post-recession environment look like? There is a risk in the medium term that growth will be weaker than we’re used to.”

The pound dropped as much as 0.4 percent against the dollar after the report. The U.K. currency traded at $1.6445 as of 10:03 a.m. in London.

Today’s report is the first among the Group of Seven nations for the second quarter. Brown said today that the Group of 20 nations need to take steps to revive the world economy.

“We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth,” Brown said at the opening of a meeting in his office in London.

Waning Support

Brown, who must call a general election by June, has trailed David Cameron’s Conservatives in every opinion poll this year. A July 19 survey by Ipsos-Mori Ltd. showed the ruling party lagging the biggest opposition party by 16 points.

“Today’s figures are fresh evidence of the sheer scale of the global downturn we’re fighting,” said Liam Byrne, a junior Treasury minister. “But they also show the pace of slowdown is easing compared to the winter, which is why we remain cautious but confident that growth will return towards the end of the year.”

The data show the economy has now shrunk by 5.7 percent since the recession began last year. That compares with a total 6.4 percent slump in the recession period that ended in 1981, the statistics office said.

Construction, Services

Construction fell 2.2 percent on the quarter and 14.7 percent from a year earlier, which was the biggest annual drop since records began in 1948. Business services and finance slumped 0.7 percent on the quarter and had a record annual decline of 4.4 percent, the statistics office said.

While the government has committed as much as 1.4 trillion pounds ($2.3 trillion) to revive lending and rescue banks such as Royal Bank of Scotland Group Plc, it hasn’t stopped joblessness from increasing.

Unemployment in the quarter through May increased by 281,000, the most since records began in 1971. The jobless benefit roll has reached 1.56 million, the most in 12 years.

Policy makers unanimously voted on July 9 to keep the key interest rate at a record low of 0.5 percent and said they’ll review the size of their 125 billion-pound plan to print money in August, when they publish forecasts on growth and inflation. link.....