UK growth increases chance of rate rise

The UK economy grew twice as fast in the second quarter as first thought, revised figures showed today, increasing the chances of a rise in interest rates in the near future.

According to the new figures from the office for national statistics (ONS), Britain's economy - the world's fourth largest - grew 0.6% in the April-June period. The revision will cause consternation at the Bank, as its monetary policy committee cut rates earlier this year in response to weak data.

In July, the MPC cut rates to a 48-year low of 3.5%, justifying its decision on the grounds of economic sluggishness at home and abroad. The ONS said the big upward revision was due almost entirely to much higher than estimated construction output in figures supplied to it by the department of trade and industry (DTI).

The ONS said it was working with the DTI to improve the models the DTI uses for first and second estimates each quarter, before it provides actual data of output for the third estimate. The ONS acknowledged there were deficiencies in the construction data, an admission that will do little for its reputation.

While today's revised growth figures will annoy the Bank of England, the chancellor, Gordon Brown, should feel gratified. His growth estimates for this year have been widely derided as being overoptimistic by private economists. But with UK growth stronger than previously thought, Mr Brown might well have the last laugh.

For this year, the chancellor has pencilled in growth of between 2% and 2.5%. Most economists, including those from the International Monetary Fund, have been trimming their growth estimates for the UK and the consensus is that growth will come in at only 1.7%.

"It's building a picture of faster recovery in the UK economy relative to the rest of Europe," David Brown at Bear Stearns told Reuters. "That is going to have an impact on perceptions of where the next move in UK interest rates is going."

The ONS also released data showing the country suffered its worst ever current account deficit in the quarter, of ?8.6bn. The big deficit was largely due to a drop in investment income due to lower profits of UK companies operating abroad, especially oil companies.

It was also caused by foreign owned companies, especially banks and insurers, making higher profits in Britain. But here again, the current account numbers are subject to big revisions. For example, the ONS revised the first quarter number to a deficit of ?2.3bn from a surplus of ?2.4bn.