By Sumeet Desai and Fiona Shaikh
LONDON, June 30 (Reuters) - The British economy shrank at its fastest pace in more than 50 years in the first three months of 2009 and has been in recession for a whole year, boosting expectations ultra-loose monetary policy could get even looser.
More timely surveys also out on Tuesday, however, suggested the worst is now over and the government, which desperately needs recovery before an election expected next May, said it still expected growth to return by year-end.
But economists said the revised official GDP data raised the chances the Bank of England would boost its 125 billion pounds quantitative easing programme to support the economy, especially as inflationary pressures were seen weaker now.
GDP fell by 2.4 percent in the first quarter, the biggest decline since Q2 1958 and much worse than the 1.9 percent decline published last month because of downward revisions to services and construction output.
On the year, it fell a record 4.9 percent and output in previous quarters was revised down, meaning Britain's first recession since the early 1990s has been running longer and deeper than previously thought.
"'You've never had it so bad' seems the most apt summary of the state of the UK economy in Q1," said Ross Walker, UK economist at RBS.
"It does serve to emphasise the size of the hole out of which the UK must climb. The survey data suggest we have at least stopped digging, but the economy remains on course for a lacklustre pace of recovery."
The pound fell after the worse-than-expected GDP figures, having earlier risen to an 8-month high against the dollar after the Nationwide building society said house prices rose for a second month running in June.
The Nationwide figures came shortly after a survey by GfK/NOP showed consumer confidence hit its highest in 14 months in June as people became more optimistic about their finances.
"There have been some tentative signs that the fall in output is moderating and I remain confident but cautious about the prospects for the economy," Treasury minister Liam Byrne said after the data.
MORE QE?
BoE policymakers, who cut interest rates to a record low of 0.5 percent in March, have also been circumspect about declaring victory over a recession that has already claimed hundreds of thousands of jobs and some of Britain's best-known companies.
They have noted the signs of improvement in the economy but said part of this is a result of the inventory cycle as firms rebuild their stocks after running them down.
The downward revisions to GDP also mean the output gap is much greater than first thought, helping to reduce inflationary pressures. The BoE's last forecasts in May showed inflation undershooting the 2 percent target significantly then.
"Our total GDP forecast for 2009 is now down around 4 percent," said David Page, economist at Investec. "We suspect these changes add arguments for further QE operations."
Separately, the Office for National Statistics also released data showing Britain recorded a much bigger than expected current account deficit of 8.540 billion pounds in the first quarter.
"The UK national accounts and balance of payments figures for Q1 underline the fact that the economic recovery is built on very fragile foundations," said Jonathan Loynes, chief European economist at Capital Economics.
(Editing by Mike Peacock/Victoria Main)