Britain sinks deeper into recession

Britain’s economy has shrunk far more than expected in the second quarter, battered by everything from an extra public holiday to government spending cuts and the neighbouring euro zone crisis.

Finance minister George Osborne said figures released on Wednesday showed Britain had “deep-rooted economic problems,” adding that the slump in the second quarter was disappointing even when taking into account one-off factors that hurt.

Britain’s gross domestic product fell 0.7 per cent from the first three months, the sharpest drop since the height of the global financial crisis in early 2009, the Office for National Statistics said.

Output in Britain’s service sector — which makes up more than three quarters of GDP – contracted by 0.1 per cent in the second quarter after growing 0.2 per cent in the first quarter of 2012.

Industrial output was 1.3 per cent lower, while construction – which accounts for less than 8 per cent of GDP – shrank by 5.2 per cent, its biggest drop since the first quarter of 2009.

The figures confirmed that Britain remains mired in its second recession since the start of the financial crisis, with the economy shrinking for a third consecutive quarter.

Headache for the government

The broad-based slump will fuel pressure on the government to get the economy growing again after a crisis that has left many Britons poorer with rising prices and higher taxes eating up meagre wage increases.

However, Osborne said he has no money left for a meaningful spending boost, having staked his reputation on a tough plan to eliminate a budget deficit, still around 8 per cent of GDP. The lack of growth also puts this goal into question.

Sterling hit its lowest in nearly two weeks against the dollar after the data, and two-year government bond yields hit a record low on speculation that the Bank of England may have to provide more economic stimulus than expected.

The weak economy remains the biggest headache for the government, and the opposition Labour party seized on the latest slump to reiterate its call for a change in policy.

“We need some action from the chancellor (finance minister), not excuses … and digging a deeper hole for the country,” Labour finance spokesman Ed Balls said in a BBC interview.

Last week the International Monetary Fund slashed its growth forecast for Britain by more than those for any other advanced economy, and warned the government and the central bank that they will need to rethink their approach if the economy fails to pick up by early next year.