Better-than-expected economic performance

Sterling notes

The UK economy suffered a smaller-than-expected contraction between April and June, but experts say the road to recovery remains rocky.

Revised figures measuring the health of the economy show a fall of 0.6% between April and June, a marginal improvement on the 0.7% previously stated last month. The figures had already been revised down from an initial 0.8%.

The revision is largely down to a better-than-expected performance from the construction industry.

However, the Office for National Statistics, which produces the figure, has also revised down the economic performance in the first quarter of the year to a decline of 2.5%, from 2.4%. This is due to weaker data on services output.

The revisions mean that, on an annual basis, the UK economy contracted 5.5% during the first half of the year - the largest annual decline since records began. This was revised down from 5.6% last month but still above the 5.4% economists had been hoping for.

While the UK remains stuck in recession, other developed countries - including Germany and Japan - saw their economies return to growth in the second quarter.

Vicky Redwood, UK economist at Capital Economics, says: “The figures highlight the fragility of the economic recovery. Overall, it still looks likely to be a long, slow recovery.”

Howard Archer, chief UK and European economist at IHS Global Insight, now expects economic growth to make a return in the third quarter of the year.

“An anticipated return to growth in the third quarter is expected to have been significantly helped by a further slowdown in inventory adjustment, consumer spending being lifted by the car scrappage scheme and a positive net trade performance as exports are supported by stabilising demand in key markets and a very competitive pound,” he says.

However, Archer also warns that there is a strong chance of a relapse early in 2010 when VAT rises back up from 15% to 17.5% and the car scrappage scheme ends: “Furthermore, we suspect the upside for growth will be limited for some time to come by elevated and rising unemployment, stretched consumer and corporate balance sheets, and muted bank lending amid still serious financial sector problems.”

He estimates the UK economy will have shrunk by 4.3% in 2009 with growth limited to 1% in 2010.

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