Growth spurt puts City on alert for interest rate rise

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Major revisions to official estimates of UK economic growth over the past five years put the City on alert for a rise in interest rates yesterday.

The economy grew faster in the first months of 2006 and each of the previous four years than first thought, with tentative evidence of the long-awaited rebalancing between the business and consumer sectors.

The Treasury, which is betting on strong economic growth over the next two years, was quick to trumpet the figures. Ed Balls, Economic Secretary to the Treasury - and tipped to be the next Chancellor next year - said the economy was "strengthening further".

The Office for National Statistics revised growth in the past two quarters from 0.6 to 0.7 per cent, seen as above trend. Annual revisions of 0.1 percentage points from 2001 to 2005 added £15bn to the size of the economy. Analysts said the stronger growth showed the economy was running closer to full capacity than previously thought.

The minutes of the latest meeting of the Bank of England's Monetary Policy Committee highlighted the lack of supply capacity as a risk to its inflation target.

Howard Archer, chief UK economist at Global Insight, said: "This increases the odds of a rate hike before the end of the year."

The breakdown of revisions showed consumer spending was weaker than first thought in 2004 and 2005, and companies and workers had increased pension payments while business investment accelerated.

Household expenditure grew just 1.3 per cent last year rather than the first estimate of 1.7 per cent, while 2004 was revised down by 0.1 percentage point. The ONS said revisions were driven by lower sales of household goods. Spending on household goods and services - everything from televisions to gardening - fell by 1.3 per cent in 2005 rather than growing by 1.6 per cent as first thought.

Business investment was revised up in 2004 and the latest quarter, while the volume of exports was stronger in 2003, 2004 and 2005, thanks to new figures on earnings for banks.

Meanwhile the savings rate - the share of their disposable income households put aside rather than spend - was revised up to a two-year high of 6 per cent. This was driven by a rise in pension contributions and national insurance payments of 5.7 per cent in the final quarter of 2005 and 6.3 per cent in the first months of this year, compared with 2.3 per cent in the third quarter of last year.