Economy growth renews speculation of interest rate rise

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The Independent Online

Britain's economy continued to grow healthily in the second quarter of this year, the Office for National Statistics has confirmed, renewing concerns that the Bank of England may yet be forced to raise interest rates despite the recent credit market turmoil.

The economy's annual growth rate stood unrevised at 3 per cent, according to the ONS figures, with gross domestic product up 0.8 per cent on the first quarter of this year.

Excluding the public sector and the North Sea oil industry, private sector growth is running at an impressive 3.7 per cent a year - "above trend" according to some economists. The growth was fairly broadly based across the economy, but manufacturing, construction and computing services turned in especially strong performances. However, the data also indicated some recent inflationary pressures, with the implied GDP deflator, one measure of inflation in the economy, accelerating from 3.1 per cent to 3.8 per cent year-on-year - the highest seen for more than a decade.

Much of this was due to the rising price of British exports (including oil), which does not affect consumer prices directly. Prices in the shops, according to the CPI, the Bank of England's preferred indicator, saw a marked reduction in annual inflation to 1.9 per cent last month, a period not covered by these GDP statistics.

Alan Monks, of JP Morgan, said: "The rise in export price inflation relative to imports helped to push the GD deflator higher, but is a very noisy and revision-prone part of the data, so we should view the high level of the deflator a little suspiciously." The data also revealed that corporate profits were growing exceptionally quickly.

The ONS was also keen to point out that the national income statistics have been considerably distorted by the phenomenon of VAT "missing trader intra-community" fraud.

Otherwise known as "carousel trade", the fraud involves criminals repeatedly trading large quantities of items such as mobile phones and effectively making off with the VAT that should be paid to the exchequer.

Although subsiding, the fraud had reached about £1bn a month last summer, with some £5bn a month of trade being potentially misreported in the national accounts.

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