UK economy shows strong growth

The UK economy grew at a fastest rate than expected in the second quarter of 2007, new figures from the Office for National Statistics (ONS) reveal.

The ONS data reveals that GDP rose by 0.8 per cent in the three months to June, 0.1 per cent above predictions. Annual growth stood at three per cent, ahead of the forecast of 2.9 per cent.

Growth was fuelled by stronger production and construction output that offset weaker growth in the services, which remained the key driver of GDP.

Production output rose 0.6 in the last quarter buoyed by stronger manufacturing, compared with a 0.1 per cent fall in the previous three months.

Most notable growth also came from the transport and storage sector and the business services and finance sector.

The figures represent the sixth successive quarter that the economy has expanded above its trend rate and has fuelled speculation that the Bank of England may increase interest rates further to counter inflation without fear of harming prospects for the economy.

However, some analysts predict that the growth recorded now may be the peak of activity.

Howard Archer, chief UK and European economist at Global Insight, said: "We suspect that the second quarter will mark the peak in growth and end that it will lose momentum over the second half of the year.

"In particular, we believe that the consumer will have to tighten his belt to some degree over the coming months in the face of higher interest rates, muted real disposable income growth and higher debt levels."

He went to predict that with GDP set to slow in 2008 to 2.5 per cent, from the expected 2007 level of 2.8 per cent, a peak in interest rates of six per cent can be expected.

However, David Brown of Bear Stearns told the BBC that further rate increases over six per cent could be possible.

He said: "UK growth is very strong, inflation is too high and monetary expansion is running far too fast. There is no end in sight to the current rate tightening cycle.

"Since the bulk of growth comes from consumer spending, it leaves domestic demand at risk of over-heating with negative consequences for inflation. It would be no surprise that the Bank is straining on the leash for another quick hike in rates."