Economy in UK could start to shrink

Economic growth is expected to slow a little bit more in the second quarter and analysts say it won't be long before the economy flatlines or even starts to shrink.

Economists polled by Reuters expect GDP growth in the second three months of the year to slip to 0.2 per cent on the quarter, the weakest since first quarter of 2005, after 0.3 per cent growth in the first three months of the year.

That would bring annual growth down to 1.6 per cent from 2.3 per cent - the slowest since the second quarter of 2005.

Britain is the first of the G7 economies to publish growth figures for the second quarter.

Analysts put the chances of a UK recession - two consecutive quarters of contraction - at about 40 per cent in the next 12 months, but it is also possible that growth could hold up.

Any sign of resilience in the economy is likely to boost expectations that the Bank of England will not cut interest rates any time soon, if anything investors may bet that policymakers have room to hike rates to tame inflation. The bank said in the minutes to its July rate meeting that the broad outlook for growth would probably be worse than they forecast in May, but the near-term picture may not be that bad.

"Although GDP growth in the second quarter might turn out to have been slightly stronger than expected, there had been some very weak survey data towards the end of the quarter," the minutes said.

Not least in Thursday's retail sales figures which showed sales falling last month by the largest monthly amount since the series began in 1986, more than wiping out May's record jump.

"Shoppers are looking to postpone spending," said Martin Digby, senior executive in Accenture's retail strategy practice.

Nonetheless, while slowing, consumer demand has held up surprisingly well overall this year, considering sharp falls in house prices, rising unemployment and strong inflation.

Volumes were up 0.6 per cent quarter-on-quarter between April and June, albeit the weakest such growth since December last year.