World Bulletin / News Desk
Britain's economy shrank far more than expected in the second quarter of 2012, battered by everything from an extra day's holiday to budget austerity and the neighbouring euro zone crisis.
Finance minister George Osborne said the country had "deep-rooted economic problems".
The Office for National Statistics said Britain's gross domestic product fell 0.7 percent in the second quarter, the sharpest fall since early 2009 and a bigger drop than any of the economists surveyed in a Reuters poll last week had expected.
The figures confirmed that Britain is mired in its second recession since the financial crisis, with the economy shrinking for a third consecutive quarter.
It will add pressure on Osborne to get the economy growing again after a crisis that has left many Britons poorer as rising prices and higher taxes ate up meagre wage increases.
Sterling hit its lowest in nearly two weeks against the dollar after the data, and government bond prices rallied on speculation that the Bank of England may have to provide more economic stimulus than expected.
Earlier this month the BoE has announced another 50 billion pound programme of gilt purchases with newly created money to soften a grim economic outlook, but Wednesday's data is likely to add to market speculation that it may cut interest rates later this year.
"This is terrible data. Frankly there's nothing good that comes out of these numbers at all," said Peter Dixon, an economist at Commerzbank.
"The economy looks to be badly holed below the water line at this stage. It's a far worse period of activity than we'd expected."
Economists had been expecting an extra public holiday to mark Queen Elizabeth's Diamond Jubilee to reduce output by around 0.5 percent, so the latest figures suggest the economy is also contracting on an underlying basis.
The ONS said it was too early to provide an estimate of the Jubilee effect, but warned that this and very wet weather added "uncertainty" to its calculation of economic activity towards the end of the quarter.
Output in Britain's service sector -- which makes up more than three quarters of GDP -- contracted by 0.1 percent in the second quarter after growing 0.2 percent in Q1 2012.
Industrial output was 1.3 percent lower, while construction -- which accounts for less than 8 percent of GDP -- contracted by 5.2 percent, its biggest drop since the first quarter of 2009.
Overall second-quarter GDP was 0.8 percent lower than a year earlier, the biggest decline since the last three months of 2009.
Before Wednesday's data, most economists expected a return to growth in the third quarter, as the London Olympics offer a one-off boost through ticket sales and visitors spending.
And some argue that increasing employment levels suggest the economy is healthier than the headline GDP figures suggest.
But the overall outlook is poor. 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 BoE that they will need to rethink their approach if the economy fails to pick up by early next year.
Eliminating Britain's structural budget deficit over the next five years is the central political goal of Britain's coalition of Conservatives and Liberal Democrats, but the opposition Labour Party says the pace is too rapid.
Over the past month the coalition and BoE have announced several measures to ease the flow of credit to households and businesses, as the euro zone debt crisis saps demand in Britain's major export markets.
But for now, any change to the fiscal austerity programme is opposed both by finance minister George Osborne and BoE Governor Mervyn King, who fear it could trigger a loss of confidence in Britain's commitment to long-term deficit reduction.
"We're dealing with our debts at home and the debt crisis abroad. We've made progress over the last two years in cutting the deficit by 25 percent and businesses have created over 800,000 new jobs," Osborne said in a statement.
"But given what's happening in the world we need a relentless focus on the economy and recent announcements on infrastructure and lending show that's exactly what we're doing."
Volatility eased as traders focused on the world economy and corporate earnings after a week dominated by the dramatic spike in tensions over North Korea, which triggered a global sell-off before prices bounced back Monday.
Investors greeted the more conciliatory tone after US stocks dropped three days in a row last week on President Donald Trump's vow of "fire and fury" if North Korea continued to pursue its nuclear weapons and ballistic missile programs.
The ultra-conservative kingdom has moved to diversify its traditionally oil-dependent economy following a sharp fall in crude prices.
In its monthly report on the global oil market, the International Energy Agency said, however, that it believes the supply glut is easing, partly because demand is growing faster.
US stocks have been in retreat since President Donald Trump Tuesday issued a fiery warning to North Korea to halt its nuclear program.
The move by one of Japan's best-known firms greatly reduces the chance of an embarrassing delisting from the Tokyo Stock Exchange (TSE).
London's benchmark FTSE 100 index weakened by 0.5 percent to 7,503.39 points.
The approval by the European Commission comes just over two months after the European Central Bank -- which took on the role of the eurozone's banking supervisor in 2014 -- allowed the sale to go ahead for a symbolic fee of one euro.
BP, Chevron, ExxonMobil, Shell and Total have all published results in recent days, showing they pocketed $23 billion in net profit in the first half fo the year.
Higher cereal, sugar and dairy prices pushed food price index by 10.2 percent annually in July
HSBC was also a big riser, gaining three percent at £7.65 ($10, 8.5 euros) in late morning trade after the British banking giant announced a share buyback plan alongside a rise in first-half profits.
Both main crude contracts made strong gains, with WTI testing $50 a barrel for the first time since late May and Brent heading towards $53, while mining giants BHP Billiton and Rio Tinto saw their share price rise as commodities strengthened.