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UK economy shrank 0.2 percent in Q3

LONDON - LONDON (AP) — The British economy shrank less than previously estimated in the third quarter but the improvement fell short of economists' expectations, casting a shadow of doubt over the country's sluggish recovery.

But there were also some positive signs in the data release from the Office for National Statstics on Tuesday, which revealed that gross domestic product contracted 0.2 percent in the July to September quarter.

It was the third and final revision of the third quarter data — improving on earlier estimates that had put the contraction first at 0.4 percent, then 0.3 percent.

The latest revision left the year-on-year fall in gross domestic product unchanged from the second estimate at 5.1 percent.

Economists had expected a greater improvement, with forecasts for the quarter ranging from a 0.1 percent shrinkage to around a 0.2 percent expansion — growth of any kind would have officially ended Britain's worst recession since World War II.

"While any upward revision to GDP is welcome news, there is no denying the fact that it is a disappointment," said IHS economist Howard Archer.

Previous quarters in the recession were also revised downward by the Statistics Office to a 0.7 percent contraction between April and June and a 0.9 percent fall in the third quarter of last year.

Britain's recovery from its worst economic downturn since World War II has lagged behind the United States and eurozone, which have already recorded renewed growth.

The Bank of England and the government both expect Britain to formally exit recession in the fourth quarter.

"While the economy is still hardly racing ahead, latest data and survey point to growth finally getting underway in the fourth quarter," said Archer. "Nevertheless, serious economic and financial obstacles to significant, sustainable growth remain, and we suspect that recovery will be gradual and prone to losses of momentum."

The Statistics Office reported an expected strong gain in the construction sector, where output increased 1 percent over the third quarter. But that was not enough to override poor perfromances in other sectors. Output in the country's huge service sector fell 0.2 percent, mainly due to continued weakness among financial services firms such as banks and insurers.

Output from production industries fell by 0.9 percent on the quarter, with a 0.2 percent decline for manufacturers, although there were some bright spots such as a 0.7 percent output rise from hotels and catering.

Meanwhile the household savings ratio — the share of income put aside by families — rose to an 11-year high of 8.6 percent during the third quarter of the year as households bunkered down to ride out the recession. The ratio stood at 7.6 percent in the second quarter.

Jonathan Loynes, chief European economist at Capital Economics, said that the sharp rise in the ratio "might suggest that the process of household deleveraging is further advanced than previously thought, while the current account deficit has been revised down sharply."

"On the face of it, those changes certainly make the economy look rather better balanced than before," he said.

"But don't get too excited," he added. "With household debt still very high, credit constrained and a fiscal squeeze looming, the economy still has a lot to contend with."


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