Surprise as UK economy grows twice as much as expected

(Update) Economists have reacted with surprise as construction grew faster than in any quarter since 1963 lifting the UK's gross domestic product (GDP) by 1.1% in the second quarter, sparking talk of a rise in interest rates and lifting the pound.

UK GDP grew 1.1% in the second quarter more than twice the expansion economists had been expecting and stronger than in any quarter since 2006. The prospect of an early rise in interest rates, which would cheer savers but alarm many businesses, lifted the pound but depressed the stockmarket with the FTSE 100 down 17 points at 5,296.

Sterling stormed more than two cents higher against the dollar to $1.5414 and a cent higher against the euro to €1.1917 after the much better-than-expected news on UK growth from the Office for National Statistics.

Double dip fears dispelled for now

Economists had been expecting the economy to grow 0.5-0.6% - faster than the 0.3% recorded in the first three months of the year - but well below today's preliminary number.

Azad Zangana, European economist at Schroders, said: 'The latest estimates are a very positive surprise which should provide a boost to consumer confidence heading into the second half of the year.'

Zangana still expects the pace of growth to slow later in the year but believes there is now enough momentum to avoid a double-dip recession.

Interest rates could rise sooner

'As for monetary policy, this should make the [Andrew] Sentance vs [Mervyn] King debate even more interesting. Clearly there is now little evidence to support the idea of any additional stimulus in the form of quantitative easing, and Andrew Sentance's view that interest rates should rise soon, has just gained more weight,' Zangana said.

The yield on benchmark ten-year UK government bonds reflected this view jumping to 3.42% from 3.37% on the news.

Doubts about the data

A number of economists say some of the ONS data seems too good to be believed with the 6.6% leap in construction output causing the most scepticism.

Hetal Mehta, senior economic adviser to the influential ITEM club, said: 'The massive boost from construction requires cautious analysis as this data is based on a new government survey. The 6.6% jump appears to be only partly explained by a bounce back from bad weather in Q1, when construction output fell by 1.6%.'

Mehta added there was a surprising pick up in new work in the private sector. 'We would question how plausible this is,' she said.

Other commentators have suggested the jump in GDP could be explained by rthe fact that many construction projects were  delayed during the Big Freeze at the start of the year.