Surge in consumer spending boosts economy

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Britain's economy grew at the fastest pace in two years in the second quarter, powered by consumers who splashed out on flat-screen TVs and food and drink during the World Cup.

GDP rose 0.8 per cent on the quarter and 2.6 per cent on the year, unrevised from initial estimates, official figures showed yesterday.

Household spending picked up strongly, rising from 0.3 per cent at the start of the year to 1 per cent between April and June, the strongest increase for two years. Retail sales jumped 2.1 per cent in the quarter.

Economists said the figures made it likely the Bank of England would raise interest rates again soon, with November tipped as the most likely month. That would be the second rate rise this year after a surprise increase to 4.75 per cent at the beginning of this month.

There was further evidence yesterday that inflationary pressures are rising as the GDP deflator - a measure of the whole economy inflation - picked up to 3.4 per cent, the fastest since 1991.

However, analysts warned against getting carried away by the GDP figures, saying the World Cup effect would fade and there could be knock-on effects from a slowdown in the US. Many expect the UK economy to slow next year.

Alan Castle at Lehman Brothers said: "We still have some concerns that consumer spending could lose its way and it is fairly likely that there is some payback in business investment after a very strong first half."

Most areas of the economy put in a strong performance in the second quarter: government spending rose by 1 per cent and investment grew by 0.9 per cent while trade continued to act as a drag on growth.

The services industries recorded a 1 per cent increase. While the output of the production industries fell by 0.2 per cent, this was driven by declines in oil and gas production as well as gas and electricity supplies due to warmer weather after a cold first quarter. The falls were partly offset by a 0.6 per cent rise in manufacturing thanks to booming chemicals, fibre and machinery production.

John Butler at HSBC expects the Bank to raise interest rates to 5 per cent in November. But he cautioned: "Nonetheless, as the Monetary Policy Committee worry about capacity constraints and inflation, the latest rate hike threatens to come in a background in which households are more vulnerable (with unemployment rising, spending power eroded, debts higher and savings picking up). Next year is likely to see greater concerns about economic growth."

Separately, mortgage approvals rose by just 5 per cent in July from a year ago to 68,612, the British Bankers' Association reported, reflecting a seasonal downturn.