But the recovery is not reaching consumers, as the fear of unemployment, the slump in house prices and April's tax increases have subdued household spending.
Revised figures from the Central Statistical Office showed national output rose 1.1 per cent in the second quarter of the year. Output was 3.8 per cent higher than the same period the year before.
The recovery is being fuelled by export growth, rather than consumer spending, leading many City economists to predict Britain could avoid falling into another boom-and-bust cycle. Most said yesterday's revised figures for economic growth meant the Bank of England would not need to raise the cost of borrowing again soon. Kevin Darlington, UK economist at Hoare Govett, said: 'This is a sustainable recovery, and the last one wasn't. Consumers are not off to the races this time.'
The Government welcomed the figures, hoping they would set the scene for the forthcoming party conferences. Jonathan Aitken, Chief Secretary to the Treasury, said they were 'further proof that the tough economic decisions that the Government has had to take are paying off.'
But, warning that there would be no let-up in public spending control, he signalled the Government might attempt to bring spending below the planned pounds 263bn for 1995-96.
One source of the City's confidence was the balance of payments deficit in the second quarter, which was pounds 664m, down from pounds 1.3bn the previous quarter. It was the smallest deficit since the first quarter of 1987.
Exports expanded by 2 per cent in the quarter, while imports fell 0.8 per cent. The increase in consumer spending was revised down from 0.4 to 0.2 per cent.
The slow-down in consumer spending was partly due to a 1.2 per cent fall in personal disposable incomes. Much of that was caused by to April's tax increases. Pre-tax incomes fell by 0.5 per cent. The fall in spending would have been greater but consumers ran down their savings to compensate for lower earnings. The savings rate fell to 9.3 per cent in the second quarter. John Marsland, UK economist at UBS, the securities firm, said: 'Lower house prices, unemployment and insecurity about jobs had increased savings to levels not seen in years.'
Adrian Cooper, an economist at James Capel, said: 'Consumer confidence is much weaker than it was at the height of the Lawson boom. We are not creating full-time jobs and the housing market is on its knees.'
House prices in the second quarter were still 10 per cent below their mid-1989 peak, according to the Halifax Building Society.
The unemployment rate, at 9.2 per cent in August, is well above 1988's 7.8 per cent. The number of employees fell by 51,000 in the second quarter of this year. In 1988 average earnings grew at 8.7 per cent, almost double the inflation rate of 4.9 per cent. In the 12 months to July this year earnings rose 3.75 per cent compared with inflation of 2.3 per cent.
John Prescott, the deputy Labour leader, launching a campaign 'Waste of a Nation' said public spending was 40 per cent of GDP. Much was paying for unemployment, crime, privatisation and bureaucracy.
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