BRITAIN’S ECONOMY shrank more than twice as fast as expected in the second quarter of 2009.

The contraction is its biggest annual decline on record, dashing hopes of a speedy recovery from the worst recession in nearly 30 years.

GDP fell 0.8 per cent in the three months to June and by 5.6 per cent lower on the year, the steepest yearly fall since similar records began in 1955, official data showed yesterday as Britain became the first G7 country to report second quarter data.

The annual decline was significantly worse than that forecast by the Bank of England in May.

Former Bank of England (BoE)policymaker David Blanchflower said the central bank could not afford to call a halt to its asset-buying programme to pump money into the economy. “The talk of green shoots had lulled people into a false sense of security,” said Mr Blanchflower, who left the bank in May and was the only one on the rate-setting committee to predict the recession.

“The end-game for quantitative easing is a long way off. The BoE needs to expand QE a lot right now because otherwise any recovery will take an awfully long time.”

Analysts were shocked at the size of the second quarter contraction. Minutes of the BoE’s July meeting published on Wednesday had suggested the near-term outlook for the economy was brighter than the central bank had predicted in May, not worse.

Many analysts had been confident of a return to growth later this year and sterling fell more than half a cent and gilt prices rose as investors bet the recovery could take longer and the BoE might add more stimulus to the economy.

The UK economy has now shrunk for five consecutive quarters with a cumulative decline of 5.7 per cent – more than double the drop seen in the early 1990s recession and not far off the 6 per cent contraction experienced in early 1980s.

Analysts said government forecasts of the economy shrinking by about 3.5 per cent this year were looking optimistic.

“For this to now happen would require a remarkable bounce back in the second half of the year with growth of around 1.5 per cent in each of the remaining two quarters,” said Richard Snook, senior economist at the Centre of Economic and Business Research.

- Quantitative easing increases the money supply in an economy, typically only seen when interest rates are at or near zero and when the government is attempting to remedy a credit crunch situation.