The Diamond Sterling

The Diamond Sterling - 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. Chancellor 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 Bank 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.”