UK economy growth overshadowed by US risk

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The Independent Online

The UK's best growth in nearly a decade was overshadowed tonight by the growing threat of a double-dip recession in the US.

The Office for National Statistics now believes UK gross domestic product jumped 1.2% in the second quarter of this year, higher than it previously thought and the best rise since the first quarter of 2001.

Strong high street sales and a busy period for construction firms after work was delayed by snow and ice at the start of the year helped power the rise.

However any cheer from the UK was soon erased by a downward revision to US GDP growth in the same period, from 2.4% to 1.6% on an annualised basis. The downturn was blamed on the largest surge in imports in 26 years and a slowdown in the restocking of goods by companies.

While the scale of the revision was lower than some analysts feared, it still increased the pressure on US Federal Reserve chairman Ben Bernanke to take action to safeguard the faltering US economic recovery.

In a speech today, Mr Bernanke stopped short of announcing any specific measures but he did raise the prospect of another purchase of securities by the Fed in order to drive down rates on mortgages and other debt.

He described the economic outlook as "inherently uncertain" and said the economy "remains vulnerable to unexpected developments".

Economists warned that US woes revealed a regression in the worldwide recovery and that further gains of the kind seen in UK growth today were unlikely in the future - particularly in the face of fierce austerity measures.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: "The public sector will soon become a drag on growth as austerity measures begin to bite, and it would be unrealistic to expect the consumer sector to contribute much, given the numerous headwinds buffeting households."

Charles Davis, economist at the Centre for Economics and Business Research (CEBR), said today's UK performance was robust but warned that he expects economic growth in 2011 to be weaker than forecast by either the Bank of England or Office for Budget Responsibility at around 1.6%.

The advance in UK growth was driven by record-breaking gains in the construction sector, which expanded by 8.5%, its best performance since the first quarter of 1982.

There was also a 0.7% increase in consumer spending - compared with a fall of 0.1% in the first quarter - boosted by World Cup sales of food, drink and televisions.

But the ONS figures also revealed a slight downward revision to growth in the services sector, which accounts for more than 70% of GDP, from 0.9% to 0.7%, while investment fell by 2.4% on the quarter.

Samuel Tombs, economist with Capital Economics, said the figures showed that the UK recovery was built on "very fragile foundations".

The US GDP report is the latest in a string of dismal updates, including weak home sales and poor durable goods orders in the last week.

CEBR economist Owen James added: "With a truck load of miserable US economic reports recently, there are growing cries for the Fed to take further action to boost the recovery.

"The consensus mood among the central bankers will be one of genuine concern at the weakening performance of the world's largest economy. Today's data will only add to that."