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UK GDP sees shock 0.7% contraction in Q2

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25/07/2012
The UK economy shrank by 0.7% in the second quarter of the year, a far worse contraction than economists had forecast, keeping the UK mired in recession.

The first reading of the data from the Office for National Statistics showed a quarter on quarter fall much greater than the 0.2% contraction analysts had expected.

It will come as a serious blow to the government as the impact of its austerity measures kick in and the Eurozone crisis acts as a drag on growth.

Economists had also been expecting the public holiday for the Queen’s Diamond Jubilee to inhibit output.

ONS figures show output of the production industries decreased by 1.3% over the quarter, following a decrease of 0.5% between Q4 2011 and Q1 2012.

Construction sector output shrank by 5.2%, while output of the service industries decreased by 0.1% following an increase of 0.2% between Q4 2011 and Q1.

Sterling fell following the release of the data, which marks the longest double-dip recession since quarterly records began in 1955 and is believed to be the worst since the Second World War. The pound is down 0.72% against the euro at €1.276, while it fell 0.21% against the Greenback this morning to $1.547.

The yield on two-year gilts fell to a record low to stand at 0.062% shortly after the data was published.

Britain slipped into its second recession within four years at the end of 2011, posting a 0.4% contraction in the last quarter of the year and a 0.3% contraction in the first quarter of 2012.

However, things might look brighter by the third quarter of the year, as hosting the Olympics could give a much-needed boost to the UK’s economy. Goldman Sachs estimates the Games could add as much as 0.4 percentage points to GDP growth during the quarter.

Earlier this month, the IMF cut its forecasts for UK GDP growth for both this year and next as it warned of a “ratcheting up” of financial market and sovereign stress in the eurozone periphery.

The organisation cut its forecast for UK GDP growth in 2012 to just 0.2%, down from the 0.8% it predicted in its April 2012 update. It also cut its forecast for 2013 GDP growth by 0.6 percentage points to 1.4%.

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