Economy surges on services and construction sectors

The UK economy made a stunning advance between April and June with the strongest growth in more than four years, official estimates showed today.

The 1.1% advance - nearly double City expectations - was the highest since the first quarter of 2006, the Office for National Statistics (ONS) said.

The huge gains were driven by the UK's powerhouse services sector and the construction industry, although experts immediately moved to dampen optimism over the figures.

Jonathan Loynes, chief European economist at research consultancy Capital Economics, warned output was still 4% below pre-recession levels - with Chancellor George Osborne's savage emergency Budget yet to kick in.

"With recent business surveys weakening and the fiscal squeeze looming, Q2 looks very likely to be the peak in terms of the pace of growth - expect a much weaker second half," he said.

Overall the UK posted year-on-year growth of 1.6% between April and June, the strongest since the beginning of 2008. The 1.1% advance over the quarter equalled 2006 and was last higher in 1999, the ONS added.

But a political war of words immediately broke out over the figures as Mr Osborne claimed the strong private sector contribution "put beyond doubt" the coalition's decision to begin tackling the deficit immediately.

"The priority now is to implement the Budget policies which support rebalancing and help ensure the sustained growth that the Office for Budget Responsibility forecast this year and next," he said.

But Shadow Chancellor Alistair Darling warned that the brutal cuts planned could jeopardise the recovery and said the coalition "will have to accept responsibility for the risks they are taking with the economy".

"This is the final nail in the coffin of the coalition's argument that things are worse than they believed before the election," Mr Darling added.

TUC general secretary Brendan Barber accused the Government of "deficit fetishism" and said: "There is now a huge risk that cuts in spending will bring the recovery to a shuddering halt."

The pound strengthened against the dollar and the euro following the figures as markets anticipated an increased chance of rate hikes from their record low of 0.5%.

One member of the Bank of England's Monetary Policy Committee (MPC) - Andrew Sentance - is already calling for rate rises and more could come over to his camp following the stronger than expected performance.

But experts also pointed to the factors boosting the economy during the period - such as comparisons with a weaker first quarter plus the impact of one-offs such as the World Cup.

David Kern, chief economist at the British Chamber of Commerce, said the recovery was "gaining momentum" but the Budget would dampen demand.

"It will be very dangerous if the MPC starts raising rates just when the Budget measures take hold. Businesses are still facing huge pressures and it is important for interest rates to remain as low as possible for as long as possible," he said.

The detailed ONS figures sector showed services - which accounts for three quarters of the economy - had their best quarter in more than three years with growth of 0.9%.

Within the services sector, business and finance posted its strongest rise since 2007 - advancing 1.3% over the quarter.

Hotels and restaurants also saw a 0.7% advance while the only sector to register a fall was transport and communications - down 0.7% due to the impact of Iceland's volcanic ash cloud in April.

There was also a big contribution from the construction industry, which grew at its fastest pace since 1963. The huge 6.6% rise over the quarter contributed 0.4 percentage points to overall GDP as building work bounced back from a snowbound first three months of the year.

Production industries including manufacturing advanced by 1% between April and June but by far the strongest gains were enjoyed by construction, which accounts for just over 6% of the economy.

Investec chief economist Philip Shaw said the growth was "phenomenal" but warned it would be wrong to draw conclusions for the rest of the year.

"Although the recovery should be maintained over the second half of this year, it will be at a significantly less rapid pace, and with some downside risks from tighter financing conditions," he said.