Welcome news that UK's GDP shrank slightly less than expected in second quarter offset by abysmal current account figures

George Osborne's goal of building an economy that can pay its way in the world looks more distant than ever as official statistics showed Britain ran up the largest current account deficit on record in the second quarter of 2012.

The Office for National Statistics said the £20.8bn deficit – which includes the UK's trade balance, as well as the shortfall on overseas investments by UK plc – was the biggest ever for a quarter.

"Efforts to rebalance the economy towards net trade may be foundering on the wilting economic outlook in the UK's principal European trading partners," said Chris Crowe, of Barclays.

The news came as the ONS revealed that the recession-hit economy contracted by 0.4% in the second quarter, slightly less than its previous 0.5% estimate, fuelling hopes that growth may have returned between July and September.

"Latest data and survey evidence overall suggest that there is a good chance that GDP growth in the third quarter will more than outweigh the GDP contraction suffered in the second quarter," said Howard Archer of consultancy IHS Global Insight.

Labour said the upward revision of the growth figures was good news, but warned that the economy remained fragile. The shadow chief secretary to the Treasury, Rachel Reeves, said: "While any small upward revision is clearly better than the opposite, these figures confirm our economy is in the longest double-dip recession since the second world war. And that is the reason why the deficit is rising – up by 22% so far this year."

The ONS said the quarter's trade deficit on goods – £28.1bn – was the largest ever recorded, despite the Treasury's efforts to inspire a "march of the makers".

Meanwhile, a shortfall on financial transactions with the rest of the world, as foreign companies made more on their investments here than UK plc banked from foreign ventures, meant the deficit on Britain's income account in the quarter, at £5.2bn, was also the largest ever, adding to the current account deficit.

These "balance of payments" statistics, as they are known, were once a hot political issue, which has faded away in recent decades, since the liberalisation of financial markets allowed firms and countries to ramp up their borrowing to fill the gap.

But with the Treasury aiming to "rebalance" the economy from unsustainable consumer spending towards exports, the record deficit raises fresh doubts about whether the government's economic strategy is working.

There was further evidence that consumers were tightening their belts in the detailed figures, with household spending down 0.2% over the quarter. The ONS said the largest declines were in restaurants and hotels, tobacco, and food and drink, as cash-crunched families cut back on treats.

One piece of positive news for the economic outlook was a rise in business investment, which the ONS said rose by 0.9% over the quarter.

Chris Williamson, of data-provider Markit, said: "While this is still only a modest improvement in the investment picture, it is an encouraging sign with regard to corporate health."

John Walker, chairman of the Federation of Small Businesses, said: "The revision to GDP is welcome news, but we're not out of the woods yet. Our research shows that small business confidence remained weak in Q3 and we believe growth will continue to be flat in the coming months.

"Clearly employment is key to lifting sentiment and we need to see more people in full time work. The FSB believes extending the National Insurance contributions holiday to all small firms across the UK will go some way to helping to create the jobs that are needed."