Britain returns to growth trend after six months of stagnation

A marked revival in Britain's stricken hi-tech industries has helped propel the economy back into growth after six months of stagnation.

The economic growth rate rebounded to 0.9 per cent over the three months to June, the best for more than two years and delivering annual growth of 1.5 per cent.

However, the figure was slightly less than expected and is unlikely to alter the debate over interest rates when the Bank of England meets next week, analysts said.

The Office for National Statistics yesterday said its snapshot estimate for the latest quarter showed manufacturing industry delivered strong growth, ending a year-long industrial recession.

There is no figure at this stage, but analysts expect the sector, which makes up a fifth of the economy, grew as fast as 1.5 per cent, which would be the fastest for eight years.

An ONS statistician, Geoff Reed, said electrical and optical equipment manufacturing had returned to growth after a five-quarter slump. "Indeed it is expected to be the significant industry in explaining the rise in manufacturing," he said.

The fortune of the hi-techs has mirrored the UK's rise and fall, hitting annual growth levels of a sizzling 40 per cent during 2000 before suffering falls in similar magnitude as the US fell into recession. The construction industry posted another strong quarter while the services sector recovered from a seven-year low of 0.2 per cent in the first quarter to record modest growth of 0.6 per cent.

The limited breakdown from the ONS showed output in the distribution, hotels and catering sectors shot up 1.1 per cent in the latest quarter.

City economists had already factored in 1 per cent growth when concluding that the Bank's Monetary Policy Committee would leave rates on hold at their 38-year low of 4 per cent next week.

Simon Rubinsohn, chief economist at Gerrard stockbrokers, said Thursday's news of a drop in retail sales indicated that the consumer economy had run out of steam, casting doubt that yesterday's growth would be sustained. "On the back of these factors and the uncertainty stemming from the latest round of turmoil in financial markets, the economy appears unlikely to be able to maintain the strongly positive trend over the course of the third quarter," he said.

The British Chambers of Commerce said it was further evidence that the manufacturing industry was recovering but warned against pre-emptive action by the Bank.

Nick Verdi, UK economist at Barclays Capital, doubted the service sector had mounted such a meagre recovery and said it would be revised up eventually. "The first estimate of growth is a big number, which should keep the MPC from being panicked into an unnecessary rate cut," he said.

Speculation over unscheduled rate cuts were revived after the Swiss central bank cut its benchmark rate by half a percentage point to record low levels. Neither the Bank of England nor the European Central Bank would comment on rumours of co-ordinated central bank action.

Stock markets enjoyed a further, modest recovery from their recent falls on hopes that the bad news over US corporate accounting may be drying up. Wall Street took heart from a survey showing that consumers' confidence had fallen by less than some had feared. The Dow Jones index reversed an early fall to be eight points ahead by lunchtime.

In London, the FTSE 100 index regained the psychologically important 4,000 barrier, closing up 50 points, or 1.3 per cent, at 4,016.