Public spending accelerates to hit nine-year record

Government spending accelerated at its fastest rate for nine years over the summer, in the first sign that the Government's spending plans are starting to stimulate the economy.

Government spending accelerated at its fastest rate for nine years over the summer, in the first sign that the Government's spending plans are starting to stimulate the economy.

Public spending rose 1.9 per cent in the second quarter, a sharp reversal from the 0.6 per cent fall in the first three months of the year and the strongest since 1991. There was also an increase in domestic demand from 0.2 per cent to 0.9 per cent. The Bank of England is anxious to see a slowdown.

Richard Jeffrey, UK economist at Charterhouse Securities, said: "We have to question whether the Government should be happy to spend as much as it is."

But there was ammunition for interest-rate doves. Most consumer spending went on necessities such as food and energy rather than "big ticket" items.

The economy showed signs of a rebalancing, with growth in the production industries outpacing services for only the second time in five years. While service sector growth was revised down from 1.0 per cent to 0.9 per cent, production grew at 1.4 per cent.

The net effect left economic growth unrevised at 0.9 per cent - an annual rate of 3.1 per cent, the strongest for two years.

Analysts were divided over the impact for interest rates while the financial markets were little moved by the data. Mr Jeffrey said: "If output struggles to keep up with demand that will prove inflationary and I think we are beginning to see that in the labour market," he said. "Interest rates will have to rise."

But Jonathan Loynes of Capital Economics said annual domestic demand in the first half of the 2000 had slowed to 3.0 per cent from 4.5 per cent in the last half of 1999. "The seeds have been sown for a modest slowdown in growth," he said.

Separate figures showed a surge in exports cut the trade deficit with the European Union to its lowest level for three years despite the strength of the pound against the euro. The EU trade gap narrowed to £131m in June from £576m thanks to a 5 per cent rise in exports while imports fell 1 per cent. That contributed to a fall in the global trade deficit to £2.23bn from £2.35bn. Data for July showed Britain's deficit with non-EU nations rose to a record £2.80bn from £2.15bn on the back of an 8.5 per cent slump in exports.