U.K. Economy Grows Faster Than Forecast on Services in Q3

Oct 19, 2007 - The U.K. economy grew faster than economists forecast in the third quarter, driven by services from airlines to banks, a sign higher borrowing costs have yet to cool expansion.

Gross domestic product increased 0.8 percent, the same as in the second quarter, the Office for National Statistics said in London today. Economists forecast 0.7 percent, according to the median of 34 predictions in a Bloomberg News survey. The annual growth rate was 3.3 percent, the most since 2004.

Service industries, which make up three-quarters of the economy, expanded as business and finance held at the quickest growth pace since 2003. Investors speculate bank earnings will now weaken after credit costs jumped. Bank stocks comprise 37 percent of the benchmark FTSE-100 index, whose 6 percent gain this year has lagged increases of 11.4 percent on the Dow Jones Industrial Average and 20 percent for Germany's DAX.

``The momentum coming into the U.K. economy in the services sector, particularly in the financial sector, will abate,'' Kenneth Wattret, an economist at BNP Paribas in London, said in an interview. ``That will put Bank of England rate cuts on the agenda for early next year.''

The pound rose 0.4 percent after the report and traded at $2.0493 as of 12:31 p.m. in London. The currency reached a 26- year high of $2.0654 on July 24.

Rate Increases

The Bank of England raised its benchmark rate to 5.75 percent in the year through July, leaving Britons with the highest borrowing costs in the Group of Seven industrialized nations and increasing the repayments on the nation's record 1.4 trillion pounds ($2.8 trillion) of consumer debt.

London, which rivals New York in some markets as the world's largest financial center, has led the U.K.'s economic growth after a banking boom prompted record bonus payouts of 8.8 billion pounds at the start of this year, the Centre for Economics and Business Research Ltd. estimates.

Contagion from the U.S. mortgage market collapse, which prompted a surge in borrowing costs, is spreading to the U.K. and Europe. A worsening U.S. housing slump sent profits lower at Bank of America Corp. and Washington Mutual Inc. yesterday, putting financial company earnings on pace for the worst quarter in at least a decade.

Business Services

Business and financial services, which account for 28 percent of the U.K. economy, expanded 1.7 percent, the statistics office said. Manufacturing growth slowed to 0.2 percent from 0.8 percent in the second quarter.

The International Monetary Fund on Oct. 17 raised its forecast for the U.K. economy this year, predicting growth of 3.1 percent, the fastest pace since 2004. The fund forecast expansion to slow to 2.3 percent in 2008. The group predicts the euro-region's economy will grow 2.5 percent this year and 2.1 percent next year.

The IMF also reduced its global growth forecast for 2008 and warned that it might still be too optimistic, given threats posed by the sell-off in credit markets. The U.K. GDP report is the first for the third quarter from a G-7 economy.

Britain's growth will be among the fastest of the G-7 this year and the economy is well placed to weather a slowdown, Chancellor of the Exchequer Alistair Darling told lawmakers in Parliament yesterday. The Labour government, led by Tony Blair until Gordon Brown replaced him as prime minister in June, has now overseen 41 consecutive quarters of growth.

Northern Rock Panic

The collapse of the U.S. subprime mortgage market led to a jump in credit costs and a panic among savers at Northern Rock, the Newcastle-Upon-Tyne, England-based home-loan lender.

A survey of U.K. banks shows they are now poised to reduce the supply of credit to companies ``significantly,'' the Bank of England said Sept. 26. Services expansion weakened to a 13-month low in September, the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc said Oct. 3.

U.K. house prices fell at the fastest pace in two years in September after higher interest rates and concern about the outlook for economic growth sapped homebuyers' confidence, the Royal Institution of Chartered Surveyors said Oct. 11.

Bank of England Governor Mervyn King said in an Oct. 9 speech that policy makers won't reduce the benchmark interest rate to shield banks from the credit slump.

While the bank's Monetary Policy Committee considered a cut at its Oct. 4 meeting, only David Blanchflower sought an immediate move, citing ``downside'' risks to economic growth. The majority of policy makers said that business surveys have ``stayed firm'' and there is little sign of weakening.

Inflation stayed below the bank's 2 percent target for a third month in September, giving policy makers scope to reduce the benchmark if growth slows. Annual gains in consumer prices, at a rate of 1.8 percent, matched the lowest since March 2006.

Of 18 economists surveyed Oct. 12 by Bloomberg News, 12 predict the bank will lower its rate by a quarter-point in February. Four expect a reduction in November.

UK Trade Deficit Narrows In August

Oct 9, 2007 - UK's trade deficit contracted to 4.1 billion pounds in August from a deficit of 4.6 billion pounds in July, the Office for National Statistics, ONS, said on Tuesday. In the three months to August, trade deficit grew marginally to 12.3 billion pounds after posting a deficit of 12.2 billion pounds in the previous three months.

UK's deficit on trade in goods narrowed to 6.9 billion pounds in August, from the deficit of 7.4 billion pounds revised up from 6.8 billion pounds in July. Economists were expecting a deficit of 7 billion pounds.

The trade deficit with non-EU countries was 3.9 billion pounds in August, a little less than economists' consensus of a 4 billion pound deficit. In July the deficit was 4.4 billion pounds, revised up from the deficit of 4.2 billion pounds in the first estimates.

Total exports of goods grew 0.5% in August, to 19 billion pounds while imports eased 2% to 25.8 billion pounds. Exports to the EU were little changed, while imports from the EU slipped 0.5%. Exports to non-EU countries rose 1.5%, helping to narrow the trade deficit, while imports from non-EU countries dropped 3.5%.

Though monthly data are volatile, the latest estimate of the trends indicated that the goods deficit with the whole world was fairly flat, the ONS said.

In the three months to August, the deficit on trade in goods declined 0.1 billion pounds to 20.8 billion pounds. Exports climbed 5.5%, while imports grew 3.5%.

Compared to July, the volume of exports increased 3.5%, while imports declined 2%, in August. Both export and import prices slipped 0.5%.

The balance on trade in oil showed a deficit of 0.5 billion pounds in August, more than the 0.3 billion pounds deficit in July. This was the highest deficit in more than a year, according to the ONS.

In the three months to August, exports of all the main commodity groups showed a rise in volume except fuels, the ONS said. Exports of manufactured products like cars climbed 11%, while exports of capital goods and exports of consumer goods other than cars, posted 9.5% growth each. Exports of chemicals grew 3.5%, while exports of semi-manufactured goods advanced 2.5%.

Imports of all commodity groups except fuels increased in the three months to August. Imports of manufactured products such as cars jumped 9.5%, while imports of consumer goods other than cars grew 6.5%. Imports of capital goods advanced 4.5%, while imports of chemicals expanded 10% and imports of other semi-manufactured goods grew 1.5%.

Exports of goods to the U.S.A. rose 0.6 billion pounds in the three months to August, while export of goods to France increased by 0.5 billion pounds. Imports of goods from the U.S.A. rose 0.4 billion pounds while imports from Canada advanced 0.2 billion pounds. Import of goods from Norway and China eased 0.2 billion pounds.

In August, UK's trade in services registered a surplus of 2.7 billion pounds, a tad lower than the surplus of 2.8 billion pounds in July.

The surplus on trade in services was 8.5 billion pounds in the three months to August, compared to the surplus of 8.7 billion pounds in the previous three months. Exports of services declined 0.6 billion pounds to 33.4 billion pounds, while imports of services slipped 0.3 billion pounds to 24.9 billion pounds.

The trade figure came as no surprise even though the pound has soared to historic highs in recent months, making exports uncompetitive and imports cheaper. A down side of the current financial market crisis was that UK's services exports which consisted of a big chunk of financial services, could be hit. The UK Services Purchasing Manager's Index, PMI, fell to a 13-month low reading of 56.7 in September. Activity and new orders were weaker in the financial intermediation industry than previously.

BNP Paribas forecast that the UK economy would grow 2.8% in both 2007 and 2008. The trade deficit for the full year 2007 was projected at 77.6 billion pounds, rising to 87.1 billion pounds in 2008. The current account deficit was forecast at 47.8 billion pounds in 2007, or 3.7% of GDP.

The economy is now operating at close to or even above potential, BNP Paribas said. However, following the turbulence in the financial markets, the outlook had deteriorated and economic growth was likely to slow in the coming quarters, according to BNP Paribas.

U.K. Current Account Deficit Narrows To GBP9.1 Bln In Q2

Sep 26, 2007 - The U.K. current accout deficit narrowed to 9.1 billion pounds in the second quarter, the Office of National Statistics, or ONS, indicated Wednesday. The deficit declined from 10.6 billion pounds registered in the previous quarter. The shortfall is smaller than the expected deficit of 11.5 billion pounds in the second quarter.

The ONS said, “The second quarter deficit is equivalent to -2.6% of GDP compared with -3.1% in the previous quarter.”

The surplus on trade in services rose 0.6 billion pounds to 8.9 billion pounds, while the deficit of trade in goods narrowed 0.3 billion pounds to 20.3 billion pounds.

U.K. Q2 Annual Economic Growth Rev. Up To 3.1%, Expands 0.8% Sequentially

Sep 26, 2007 - The U.K. economy expanded 3.1% annually in the second quarter, revised up from 3.0% estimated earlier, the latest report from the Office of National Statistics, or ONS, showed Wednesday. Compared to the first quarter, the economic growth stood at 0.8%. The sequential growth number was left unrevised from the initial estimate.

The total volume of output in the production industry climbed 0.7% in the second quarter, within which manufacturing output rose 0.8%. The report said within manufacturing, the largest growth were witnessed in transport equipment and paper, printing and publishing. Services output increased 0.9% in the second quarter, slightly smaller that the 1.0% growth seen in first quarter.

Gross domestic expenditure improved 0.6% in the second quarter. Meanwhile, gross fixed capital formation dropped 0.9%. The trade deficit narrowed to 10.3 billion pounds in the second quarter from 10.8 billion pounds in the previous quarter.

U.K. August Budget Deficit Swells on Spending Growth

Sep 24, 2007 - The U.K. had a larger budget deficit than economists forecast in August as spending jumped and revenue from profits fell, piling pressure on the government to save money as income from financial services dwindles.

The 9.1 billion-pound ($18.4 billion) shortfall was the highest for the month since records began in 1993, the Office for National Statistics said in London today. It exceeded the median 6.5 billion pounds forecast in a Bloomberg survey of 20 economists.

Spending grew twice as fast as revenue, making it harder for Chancellor of the Exchequer Alistair Darling to cut borrowing. At the same time, revenue may be eroded as the collapse of the U.S. subprime mortgage market hits the profits of banks and cools a decade-long housing boom.

"The financial services sector and corporations have been providing a lot of revenue, and if that slows the near-term outlook for public finances will look worse," said Nick Kounis, an economist at Fortis Bank in Amsterdam who formerly worked on budgetary affairs at the U.K. Treasury.

Government income rose 3.6 percent in August from a year earlier. Corporation tax payments almost halved due to rebates, while value-added tax, a levy on sales, fell by 1.6 percent.

Spending rose by 7.4 percent as departmental outlays increased 8.7 percent and higher borrowing costs pushed up interest payments.

Spending Limits

The increase suggests the Treasury is finding it hard to rein in departments after almost a decade of soaring investment in schools and hospitals drove up taxes and borrowing.

Darling has signaled he intends to stick to the tight budget limits set out by his predecessor Gordon Brown, now prime minister, when he fixes funding for each department for the three fiscal years through March 2011 next month.

The clampdown risks a confrontation with government workers angered at pay increases that are less than inflation, and with Brown refusing to rule out holding an election before the 2010 deadline, pressure for more spending is likely to grow.

"Attempts to cut spending quite substantially over the coming years will be tough to balance with political considerations," Kounis at Fortis Bank said.

Worsening Outlook

Unlike Brown, who enjoyed the strongest economic growth in more than a decade during his first years as chancellor, Darling faces a worsening outlook that may imperil plans to cut the deficit by a third by 2012.

At worst, subprime mortgage losses and the credit squeeze they triggered could shave as much as 1 percentage point from the pace of growth in 2008 and 2009, costing the Treasury billions of pounds in lost revenue, Ernst & Young said Sept. 14.

James Knightley, an economist at ING Financial Markets in London, this month cut his forecast for economic growth in 2008 to 1.7 percent from 1.8 percent. In March, the Treasury forecast growth of as much as 3 percent.

London bankers' bonuses may fall to 7.5 billion pounds this year from a record 8.8 billion pounds in 2006 as higher borrowing costs paralyze leveraged buyouts and mergers, the Centre for Economics and Business Research said Sept. 18.

"The Treasury will doubtless be concerned that the recent problems in banks and financial markets will reduce the tax payments it receives from the financial sector, an unusually important source of revenue for the U.K.," said Gemma Tetlow, a research economist at the Institute for Fiscal Studies in London.

Golden Rule

Tax receipts rose 5.1 percent in the first five months, less than the 6.8 percent the Treasury forecasts for the full fiscal year. Corporation tax receipts fell 3.1 percent. Spending, up 6.4 percent on the year since April, is running ahead of the 6 percent growth projected by the Treasury.

Darling says Britain will continue to meet a golden rule that the government raises enough tax revenue to cover day-to- day spending and borrows only for investment over the economic cycle.

Excluding investment, the budget deficit in the first five months was 11.7 billion pounds, 3.1 billion pounds more than the same period a year earlier, the statistics office said. In August, the deficit was 7 billion pounds, the highest for the month since records began in 1998.

A cash-based budget measure that indicates how much the government will need to borrow through bond sales was in deficit by 5 billion pounds in August, the most for the month since 1984, the statistics office said. It compares with the median 3.5 billion pounds in a Bloomberg survey of 23 forecasts.

The statistics office also announced that it would reclassify Metronet Rail and Tubelines to the public sector from the dates in 2002 and 2003 they signed their public-private partnership contracts with London Underground. The move would add to net debt by the equivalent of 0.1 percent of gross domestic product. Debt stood at 36.7 percent of GDP in August.

The government guarantee of deposits at Northern Rock Plc, which recently sought an emergency bailout from the Bank of England, are classified as a 'contingent liability' and therefore don't appear on the balance sheet, the office said.

U.K. Retail Sales Annual Growth Accelerates In August

Sep 20, 2007 - UK retail sales posted a seasonally adjusted 4.9% growth in annual terms in August, the Office for National Statistics, ONS said, Thursday. Retail sales grew 4.4% last month. Analysts were looking for a 4% annual increase in August.

Compared to July, retail sales gained 0.6% in August, pushed by growth in food stores, clothing stores and other non-food stores. Monthly growth rates were volatile, the ONS cautioned. Retail sales grew a sequential seasonally adjusted 1.3% in constant prices in the three months to August. Retail sales in the three months to July advanced 1.2%. Sales in the same prior period of the last year were a little higher at 1.5%.

In the three months to August, sales volumes in non-food stores grew 2.2% sequentially, while sales volumes in food stores slipped 0.1%. Sales in household goods stores jumped 5.3%, the biggest increase since April 2001, the ONS said. Sales in non-specialized stores, including department stores gained 5.1%, the highest three-monthly growth for this sector since records began to be maintained in 1986, the ONS noted. The previous high was the 5.0% growth in the three months to July.

On an annual basis, the seasonally adjusted volume of retail sales gained 4.3% in the June to August period, compared to 4.1% in the three months to July. Sales in food stores edged up 0.1%, recovering from a 0.1% fall in sales in the previous period. Sales in non-food stores climbed 6.5% in the three months to August, after rising 6% in the three months to July. This was the highest growth since the three months to November 2004, when retail sales grew 7%, the ONS said.

Consumer price inflation was likely to remain in the 2% target region, the Monetary Policy Committee of the Bank of England, BoE, said at its September meeting. Employment growth continued to be strong and manufacturing had posted solid gains in output. The present turmoil in financial markets would also be contained, the Committee had opined.

Yet, analysts felt that retail sales were riding a high before a fall. They pointed out that the high summer sales were achieved by aggressive price discounting. Further, economic conditions were now tighter as acknowledged by the BoE in its latest meeting. However, given the low 1.8% inflation in August, there was a possibility of a rate cut in the coming months by the BoE, which would boost sales, experts said.

U.K. Trade Deficit Widens, Non-EU Gap Reaches Record

Sep 11, 2007 - The U.K. trade deficit widened more than economists forecast in July as the gap with non-European Union nations reached a record, suggesting the pound's appreciation is making British goods less attractive overseas.

The goods trade deficit was 7.1 billion pounds ($14.4 billion), compared with 6.5 billion pounds in July, the Office for National Statistics said in London today. Economists forecast a 6.4 billion-pound gap, according to the median of 26 estimates in a Bloomberg survey.

A pickup in manufacturing, which helped power quicker economic growth in the second quarter, may be waning after the pound reached a 26-year high against the dollar in July. Exports may falter if a surge in corporate borrowing costs, caused by the U.S. subprime mortgage crisis, cools the global economy.

"There's a risk from subprime to global demand," said George Buckley, chief U.K. economist at Deutsche Bank AG in London. "The stronger pound won't help and may weigh on exports."

The goods deficit was close to the record reached in March, the statistics office said. The gap swelled as imports increased 4 percent, outpacing the 2.6 percent gain in exports.

Exports to countries outside the European Union fell 6.2 percent, while imports rose 5.1 percent, the statistics office said. The overall goods deficit with those nations swelled to a record 4.5 billion pounds.

Pound Strength

The pound reached $2.0654 on July 24, the highest since 1981, and traded at $2.0286 in London today. Exports to the U.S., which fell on the month, account for about a tenth of overseas sales.

Cobham Plc, a U.K. supplier of radio antennas to the U.S. military, said today that its first-half profit dropped 35 percent as a weaker dollar and the sale of subsidiaries hurt revenue. The company gets almost half its revenue from the U.S.

The Organization for Economic Cooperation and Development cut its 2007 forecasts for economic growth in the U.S. and Europe on Sept. 5 and said further reductions may follow after the collapse of U.S. subprime mortgages. The OECD trimmed its U.S. forecast to 1.9 percent from a May figure of 2.1 percent, and for the euro region to 2.6 percent from 2.7 percent.

U.K. factory output, which accounts for 15 percent of the economy, unexpectedly fell in July, the first decline in five months, a government report showed Sept. 6.

Services Growth

Services, the largest part of the economy, are likely to support growth. Services growth unexpectedly quickened in August, a survey by the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc. showed on Sept. 5. Gross domestic product growth accelerated to 0.8 percent in the second quarter, from 0.7 percent in the previous three months.

The Bank of England kept its benchmark interest rate unchanged at 5.75 percent on Sept. 6 as policy makers sought to prevent higher credit costs from damaging the economy. The bank said that economic growth has sustained its pace and it is too soon to tell how financial market turmoil will affect lending.

The U.K.'s trade figures have been distorted by value-added tax fraud. The statistics office said today that it has revised 'substantially' its estimates of the fraud for 2006, which may show lower imports than previously measured. This could affect the assessment of net trade on gross domestic product and the deflator. The new estimates will be released with growth data on Sept. 26.

Oil trade showed a deficit of 300 million pounds in July, compared with a gap of 100 million pounds the previous month. The measurement for June was changed from a surplus after the tax authorities detected a duplicated submission from an oil trader of 300 million pounds, the statistics office said.

U.K. August Producer Prices Rise for a Ninth Month

Sep 10, 2007 - British manufacturers increased their prices for a ninth month in August, feeding inflation pressures into the economy.

So-called output prices, unadjusted for seasonal swings, rose 0.1 percent after climbing 0.3 percent in July, the Office for National Statistics said today in London. Economists predicted a gain of 0.2 percent, the median of 26 forecasts in a Bloomberg News survey shows.

The economy is heading for its fastest pace of growth this year since 2004, giving companies room to charge their customers more. Bank of England policy makers, who noted last week that indicators of prices 'remain somewhat elevated,'are trying to contain inflation while gauging the risks to economic growth from a surge in credit costs.

"There are still price pressures in the economy," said Dominic White, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. "We see rates on hold for the foreseeable future. There's a chance they could rise, but equally there's a chance they could fall."

Traders added to bets the Bank of England will raise its benchmark rate this year. The yield on the December interest- rate futures contract rose 6 basis points to 6.39 percent.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the Bank of England's key rate for the past decade.

Core Prices

Core output prices, which exclude alcohol, tobacco, food and energy prices, rose a seasonally adjusted 0.2 percent on the month, the statistics office said. They rose an unadjusted 2.4 percent on the year, up from a 2.3 percent annual gain in July.

Overall producer prices rose on the month in five out of 10 categories, led by transport equipment, food and other products, the statistics office said.

Premier Foods Plc, the U.K.'s biggest maker of cakes and instant soup, said Sept. 4 it will meet annual profit forecasts after raising prices to cover higher wheat costs. The company said it may also consider charging more for bread and other products.

Raw-material costs, adjusted for seasonal swings, fell 0.5 percent as oil prices declined, the statistics office said. Crude oil prices slipped as low as $68.63 in August after reaching a record $78.77 a barrel on Aug. 1. On the year, unadjusted raw-material costs increased 0.6 percent.

Companies may face further pressures after the collapse of the U.S. subprime mortgage market led to a jump in credit costs, said Peter Dixon, an economist at Commerzbank AG in London.

Credit Squeeze

"If this credit squeeze leads to a slowdown in demand, that will bear on companies' pricing power," Dixon said. "Rates will remain on hold well into next year."

While the central bank's forecasts on Aug. 8 show a further interest-rate increase may be needed to get inflation under control, only five out of 22 economists in a Bloomberg News survey on Sept. 7 forecast the bank will raise the benchmark from the current 5.75 percent.

Inflation slowed below the central bank's 2 percent target in July for the first time in 16 months. The bank said Sept. 6, after its monthly rate decision, that gains in consumer prices will stay around or below the goal for the next few months.

The central bank still said that economic growth has sustained a 'solid pace' and that it is 'too soon to tell' how financial market turmoil will affect borrowing. The economy will expand 2.9 percent in 2007, the most in three years, International Monetary Fund estimates published July 25 show. That compares with its forecasts of 2 percent for the U.S. and 2.6 percent for the 13 euro countries and Japan.

BoE holds rates at 5.75 pct, sees CPI at or below target in coming months

Sep 6, 2007 - The Bank of England's rate-setting Monetary Policy Committee has kept its official interest rate unchanged at 5.75 pct for the second month running and issued its first statement to an unchanged decision for more than eight years in order to address the turmoil in financial markets over the last few weeks.

The BoE said it is too early to tell how the turmoil in financial markets will affect the availability of credit to companies and households, adding that it will monitor closely developments in credit markets.

"It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households," it said.

"As stated in its August Inflation Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation," it added.

On inflation, the BoE noted that the annual CPI rate fell back below its 2.0 pct target to 1.9 pct in July and may remain around, or a little below the 2 pct target for the next few months.

It said pay pressures remain muted and noted tentative signs of a slowdown in consumer spending.

However, the BoE said the recent solid pace of output growth has been sustained and that the margin of spare capacity appears limited. Indicators of pricing pressure also remain somewhat elevated, it added.

"Against that background, the committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term", it concluded.

This was the first time the BoE issued a statement on an unchanged rate decision since May 1999, and only the third time since it gained independence in 1997.

The decision was fully anticipated, with none of the 36 analysts polled by Thomson Financial News expecting the Bank to change borrowing costs until it can assess the impact of the turbulence in the financial markets.

Looking forward the future path of interest rates is now very unclear. The August Inflation Report indicated that one more interest rate rise would be needed in the coming months to bring the annual rate of CPI inflation back to the Bank's 2.0 pct target over the medium term.

However since then the turmoil in the credit markets has pushed market rates significantly above the base rate, and figures revealed the fall in annual CPI Inflation to below the BoE's target.

This has forced many analysts to change their forecasts. Now 11 out of 35 economists expect rates to hit 6.00 pct by the end of the year, compared to 24 out of 35 at the start of last month.

"More challenging financial market conditions present downside risks to the outlook, although recent data releases provide comfort that the UK economy entered this turbulent period on a relatively strong footing," said Andrew McLaughlin, chief economist at the Royal Bank of Scotland.

The markets will be looking for further guidance when the minutes to today's meeting are published on Wednesday, September 19.

UK 2Q GDP +3.0% YOY; Household Spending Supports

Aug 24, 2007 - The U.K. economy grew at a robust pace in the second quarter of 2007, supported by household expenditure and government spending, data from the Office for National Statistics Friday showed.

In its second estimate of economic output, the ONS confirmed that gross domestic product grew 0.8% on the quarter and 3.0% on the year, unchanged from preliminary figures released last month.

The figures were in line with consensus forecasts of economists surveyed by Dow Jones Newswires, and show that the U.K. economy is still growing above its historical average, which economists believe to be around 2.75%.

The rapid growth, which suggests the U.K.'s economic performance is likely to meet the Treasury's forecast for economic growth of between 2.75% and 3.25% over the whole of 2007, comes despite five rate increases by the Bank of England since August 2006, to 5.75% from 4.5%.

The breakdown of the numbers showed that household expenditure is an increasingly powerful engine behind growth, rising 0.8%, compared with a 0.5% gain in the first quarter, on consumption of both goods and services, the ONS said. Spending was 2.6% higher than corresponding quarter in 2006.

Government spending also grew 0.8%, with the volume of spending now 2.1% higher in annual terms, it added.

UK Q1 GDP quarterly growth confirmed at 0.7 pct, revised up to 2.9 pct yr-on-yr

May 25, 2007 - The services sector helped the UK economy expand above its long-run average for the fifth quarter running in the first three months of the year, official figures confirmed today.

In its second estimate for the first quarter, the office of National Statistics said the UK economy grew by 0.7 pct from the previous quarter.

That was unrevised from the previous estimate and in line with expectations.

This is the third quarter running that the UK has grown at a 0.7 pct rate and means that growth has now been above its trend rate -- estimated by most commentators at between 0.6-0.7 pct -- for five consecutive quarters.

Above-trend growth has been one of the major factors behind the Bank of England's decisions to raise borrowing costs on four occasions between last August and May. Interest rates are now at a six-year high of 5.50 pct and are expected to rise further, possibly as soon as next month.

This view may be bolstered by the rise in the GDP data's price component. According to the statistics office the deflator rose by an annual 3.2 pct, the highest rate since the fourth quarter of 2003.

The income indicator was also high, with compensation of employees rising by 2.0 pct in the first quarter on the back of strong growth in average earnings, mainly driven by city bonuses. The rate is up from 0.9 pct in the previous quarter and the highest rate since the fourth quarter of 2004.

Today's data also showed that GDP rose by 2.9 pct on a year-on-year basis, up on the previous estimate of 2.8 pct and above expectations for an unchanged estimate. However, it was down on the 3.0 pct growth recorded in the fourth quarter.

On the expenditure side of the accounts, the statistics office said household expenditure rose by 0.6 pct during the quarter after rising 1.0 pct in the fourth quarter.

Growth was driven by consumption of goods and services.

On a year-on-year basis, household expenditure was 3.1 pct higher on the same quarter in 2006, and up on the fourth quarter's equivalent of 2.5 pct.

Meanwhile, government expenditure rose by 0.4 pct in the latest quarter for a 2.4 pct annual gain.

The statistics office revealed that growth in the fourth quarter was again driven by the services sector, which makes up 74 pct of overall GDP.

On a quarter-on-quarter basis, the services sector grew by 0.8 pct, down on the 0.9 pct recorded in the previous quarter. On an annual basis, growth in the sector was 3.5 pct, unchanged on the previous quarter's rate.

All sub-sectors within the services sector did well, with distribution, hotels and catering up a quarterly 0.9 pct for a 3.2 pct annual gain, transport, storage and communications up 1.4 pct and 3.6 pct, business services and finance up 1.0 pct and 5.1 pct, and government and personal services up 0.4 pct and 1.6 pct.

The picture on the industrial front was less rosy, however.

Industrial production, which accounts for around 18 pct of UK GDP, was unchanged on the previous quarter following the 0.2 pct quarterly decline recorded in the fourth quarter of 2006.

On a year-on-year basis, industrial production saw output rise by 0.2 pct, down on the fourth quarter's 1.0 pct.

Within the total, manufacturing output, which accounts for around 14 pct of UK GDP, was down 0.3 pct from the fourth quarter. In that quarter, output was unchanged. Year-on-year, manufacturing output was up 1.4 pct, down on the 2.7 pct recorded in the fourth quarter of 2006.

Meanwhile, extraction output was up a quarterly 1.3 pct for a 6.4 pct annual fall, while utilities output rose a quarterly 1.3 pct for a 3.3 pct year-on-year decline.

Elsewhere, construction output, which accounts for around 6 pct of GDP, saw output rise 0.8 pct quarter-on-quarter for the second quarter running, giving an annual increase of 2.7 pct after 2.9 pct growth in the fourth quarter.

Finally, agriculture was revised down 0.1 percentage point to a 0.5 pct quarterly rise against the 0.5 pct drop recorded in the fourth quarter. On a year-on-year basis, agriculture output, which accounts for 1 pct of GDP, was down 0.8 pct against a 1.9 pct decline recorded in the fourth quarter.

Elsewhere, the statistics office said gross fixed capital formation, a broad measure of business investment, rose by 1.7 pct during the quarter, driven by a 8.0 pct rise in government investment, and sharply higher than the 2.6 pct increase seen in the fourth quarter.

On a year-on-year basis, gross fixed capital formation was 7.7 pct higher.

Business investment, which accounts for around 60 pct of gross fixed capital formation, fell by 1.3 pct from the fourth quarter, down from growth of 4.5 pct increase the previous quarter. On a year-on-year basis, business investment was up 9.6 pct.

Finally, the statistics office said net trade had no contribution to GDP.