'Double-dip' recession fears linger on

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Stronger than expected growth in the final three months of 2009 failed to dispel fears over a potential 'double-dip' recession today.

The Office for National Statistics (ONS) said the UK economy grew by 0.3% between October and December - compared with the 0.1% initially estimated - after a bigger contribution from services firms.

But the recession is now officially the deepest on record as well as the longest after figures for previous quarters were revised down - leaving the UK's peak-to-trough slump at 6.2%.

Commentators also worried that the recovery could stall in the current quarter following the impact of VAT hikes as well as January's snow chaos.

ING economist James Knightley called the latest numbers "encouraging", but said the current quarter had started poorly with retail sales plunging and lending data stalling.

"The momentum we had been hoping that the UK would be carrying into 2010 may be falling away already.

"Some of the weakness will be weather related, but election uncertainty and the implications for taxes and public sector employment is likely to keep sentiment and activity subdued," he warned.

David Kern, chief economist at the British Chambers of Commerce, added: "The UK recovery remains weak, and risks of a setback to growth later in the year are still serious."

The pound was unmoved against the dollar at 1.52 despite today's figure exceeding market hopes for 0.2% growth. Prior to the release of the 0.1% figure, forecasters had pencilled in a 0.4% advance over the quarter.

CMC Markets analyst Michael Hewson said the figures "don't really hide the fact that the economy is still vulnerable to further shocks in 2010".

But the data will relieve some of the political pressure on the Government over its stewardship of the UK through the recession as a general election looms.

Leading economists and the International Monetary Fund have backed the Government's stance on waiting before tackling the UK's ballooning deficit in recent weeks.

Chancellor Alistair Darling told the BBC: "These are welcome figures but I cannot stress too much that we are living in very uncertain times."

The latest output figure - based on more than three quarters of the data - also confirms suspicions among many commentators that earlier estimates were underestimating the performance of the economy.

The UK's powerhouse services sector - which accounts for 75% of output - performed much more strongly than first thought in the final quarter of 2009 with growth revised up from 0.1% to 0.5%.

This is the strongest growth for the sector since before the recession began in the first three months of 2008, and was widely spread across transport, wholesaling and business services such as IT and accountancy during the quarter.

Output from production industries was lifted from 0.1% to 0.4%, with manufacturing registering growth of 0.8% - twice as fast as previously thought. This was down to much stronger growth in sectors such as engineering, transport, metals and chemicals, with support still coming from the Government's car scrappage scheme.

Figures for household spending provided with today's figures also hinted at an upturn in consumer spending as the impact of record low interest rates and VAT cuts worked through the economy.

Household expenditure rose by 0.4% over the quarter - the biggest rise since the opening three months of 2008.