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UK Economy Contracts For First Time Since 2012

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The UK economy unexpectedly contracted for the first time in more than six years in the second quarter, fueling fears of a recession even ahead of Brexit due for October 31.

Gross domestic product fell 0.2 percent sequentially, partly reversing the first quarter's 0.5 percent growth, a first estimate from the Office for National Statistics showed Friday. GDP was forecast to remain unchanged.

The Bank of England had also projected a flat growth for the second quarter.

On an annual basis, the economy grew at a slower pace of 1.2 percent after rising 1.8 percent in the first quarter.

The production-side breakdown showed that the services sector output provided the only positive contribution to GDP growth. Nonetheless, services output grew only 0.1 percent quarterly, the weakest in three years.

The production sector shrank 1.4 percent, which was the biggest fall since late 2012, led by a 2.3 percent slump in manufacturing reflecting weak car production.

Mining and quarrying output fell 0.4 percent driven by the scheduled maintenance in a number of oil and gas fields.

Likewise, construction output decreased 1.3 percent due to a fall in repair and maintenance work.

The expenditure-side of GDP showed that government spending grew 0.7 percent and household consumption advanced 0.5 percent.

Meanwhile, gross fixed capital formation fell 1 percent as business investment declined 0.5 percent amid heightened economic uncertainty.

The total trade deficit narrowed GBP 16.0 billion to GBP 4.3 billion in the second quarter largely due to falling imports of goods.

The visible trade deficit declined GBP 16.6 billion to GBP 30.4 billion, while the services surplus narrowed GBP 0.6 billion to GBP 26.2 billion.

Decent consumer spending suggests a technical recession should be avoided, but the potential for business investment to decline further is still a cause for concern, James Smith, an ING economist, said.

The key point is just as stock-building and trade made first quarter GDP look better than it was, the same factors made the second quarter GDP look worse, Thomas Pugh, an economist at Capital Economics, said.

Pugh said the economy is likely to grow in third quarter, which would mean that the UK economy avoids a recession. But how the fourth quarter turns out is entirely dependent on whether there's a Brexit deal or not, he added.

In June, GDP remained flat on month in June after expanding 0.2 percent in May, data showed. Economists had forecast a 0.1 percent rise.

Monthly total production slid 0.1 percent as manufacturing contracted 0.2 percent. Meanwhile, services output gained 0.1 percent.

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