Growth figures show economy back in balance

The British economy grew at its fastest rate in nearly four years last spring, boosted by strength in all areas, the government announced yesterday.

Both manufacturing and services grew by 0.9% for the second quarter, the Office for National Statistics said. The annual rate of growth hit 3.7%, the highest rate since the third quarter of 2000.

City analysts predicted that the growth figures, which were in line with market expectations, almost guaranteed a rise in interest rates when the monetary policy committee meets next month.

"This is a robust number and highlights the case for a further tightening from the MPC. We expect the next hike to come at the August meeting," said Nitesh Shah of HSBC.

The committee has already raised interest rates four times since November but analysts believe its members will be concerned that the rapid pace of growth is using up the economy's spare capacity.

The Treasury says the economy has the capacity to grow at 2.5%-2.75% a year, or an average of 0.6%-0.7% a quarter. George Buckley of Deutsche Bank said GDP growth for the past five quarters had been above this level and concern was growing at the Bank about the risk of inflation.

Although both the service and manufacturing sectors posted the same quarterly growth rates, the British Chambers of Commerce said industrial recovery still looked fragile.

Even though manufacturing grew by 0.9% in the second quarter of 2004 compared with the same period last year, this is less than a quarter of the 4% growth seen by the service sector over the whole year.

"This sharp contrast highlights the serious difficulties still facing UK industry," said David Kern, economic adviser to the BCC.

"We remain concerned that the current clamour for accelerated interest rate increases, in order to restrain house prices, will result in damaging overkill."

The chancellor is likely to take some comfort from the figures, which appear to show the economy is beginning to rebalance.

"In total the UK economy looks in very good shape," said David Page of Investec.

"We expect the manufacturing sector to continue to post reasonable expansion as global demand provides ongoing stimulus to the export sector."