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Britain’s economy shrinks less than thought

A double decker bus is reflected in a puddle after a rain shower outside the Bank of England in the City of London.

© Stefan Wermuth / Reuters/Reuters

Britain's economy shrank less than previously estimated in the second quarter, data showed on Thursday, providing a somewhat better base for the expected modest recovery in the coming months.

However, figures from the Office for National Statistics also showed that Britain's trading position with the rest of the world worsened massively to show the biggest current account deficit on record.

Britain's gross domestic product (GDP) fell 0.4 per cent on the quarter in the three months from April to June. GDP was 0.5 per cent lower than in the second quarter of 2011.

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Economists had expected both rates to remain unrevised to show a 0.5 per cent fall on the quarter and the year.

The British economy slipped into recession in the final quarter of 2011 as the euro zone debt crisis and the government's austerity measures weighed on output.

Despite the slight upward revision, the central bank is widely expected to extend its quantitative easing asset purchases once the current 50 billion pound round of government bond buys is completed in November.

"The Bank of England is less optimistic about the return to a positive growth trend of any size in the second half of this year," said Brian Hilliard, economist at Societe Generale. "I think they're still on track to expand QE by 50 billion in November."

A steep slump of 3.0 per cent in construction output remained the main drag on the economy in the second quarter, though manufacturing production also declined by 0.8 per cent and services output shrank by 0.1 per cent.

The crisis in the euro zone – Britain's largest export market – has hurt exporters and business confidence.

Second-quarter current account data showed that Britain's deficit with the rest of the world jumped to a record-high of 20.8 billion pounds or 5.4 per cent of GDP, well-above even the most pessimistic forecast.

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