UK economy shrinks by 0.7%

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The UK plunged deeper into recession in the second quarter of this year, according to the latest official figures from the Office for National Statistics (ONS).

GDP fell by 0.7% in the three months to June, spurred by big falls in production and construction output, of 1.3 and 5.2% respectively.

The figures mark the third consecutive quarter that the economy has been in recession. In the final quarter of last year, GDP fell by 0.2%, while in the first quarter of 2012, the economy shrank by 0.3%.

As well as a weak construction sector, the ONS cites the Diamond Jubilee bank holiday as reason for the larger-than-expected drop in output, as it meant one fewer working day.

However, these figures are a preliminary estimate and the ONS could revise them up or down by 0.2%.

Vicky Redwood, UK economist at Capital Economics, says while other economic indicators, such as improved employment data, have painted a stronger picture of the UK economy; "the UK still faces significant obstacles, not least the knock-on impact of the renewed tensions in the eurozone".

Redwood adds: "Even allowing for a decent bounce-back in the third quarter, we still expect the economy to contract by about 0.5% this year and to grow by only 0.5% in 2013."

Richard Lloyd, executive director of Which?, says that the figures show that British consumers are now in the biggest financial squeeze since the 1920s.

He adds: "Four in 10 people said they planned to cut back on food spending in the coming months, and only 7% of people said they are willing to spend any leftover money they have. This growing reluctance to spend and the collapse in consumer confidence has severe implications for our economic recovery."

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