UK economy has shrunk ‘less than feared’, ONS says

The UK's double-dip recession is not as deep as previously feared after revised figures showed a smaller contraction in the second quarter of the year.

The Office for National Statistics (ONS) said gross domestic product (GDP) - a broad measure of the economy - fell 0.4% between April and June in the second upward revision.

Its initial estimate of a 0.7% contraction shocked the City in July, but smaller than previously thought falls in the production, manufacturing and construction sectors improved the decline to 0.5% last month and now 0.4%.

Hopes are now mounting of a return to growth in the third quarter after Bank of England Governor Mervyn King said last week there were "signs of a slow recovery".

Retail figures from the CBI on Wednesday also offered some welcome cheer after revealing a modest sales increase on the high street this month.

The news had been expected by economists after the ONS recently revised output from the construction sector up from a fall of 3.9% to 3%. The ONS has also revised up output from the production industry from a drop of 0.9% to 0.7% and manufacturing output from a fall of 0.9% to 0.8%.

The drop in household spending is also not as bad as first thought, down by 0.2% against previous estimates of a 0.4% decline.

Vicky Redwood, chief UK economist at Capital Economics, said: "The economy should rebound in the third quarter as the bank holiday effect unwinds and any Olympics boost comes through. But we still expect the underlying performance of the economy to remain weak and GDP may even contract again in the fourth quarter."

Chris Williamson, chief economist at Markit, added that any GDP growth would likely "remain very modest" amid ongoing troubles in the eurozone and uncertainty over the wider global economy.

Shadow chief secretary to the Treasury Rachel Reeves said: "While any small upward revision is clearly better than the opposite, these figures confirm our economy is in the longest double-dip recession since the Second World War, and that is the reason why the deficit is rising - up by 22% so far this year."