UK GDP growth revised upwards to 0.3%

The economy grew faster than originally thought in the first quarter of the year but analysts warned that growth was too reliant on temporary factors and inflation was worryingly high.

The Office for National Statistics said the economy grew 0.3 per cent in the first quarter – higher than the initial estimate of 0.2 per cent, but less than the 0.4 per cent expansion seen in the final quarter of 2009.

Industrial output had recovered faster than first thought, the ONS said but an increase in value added tax and a cold winter muted activity in the service sector. Growth looks likely to be significantly faster in the second quarter because industry and services rebounded strongly in March, meaning that even if they make no more progress the average level of output would be much higher than in the first quarter.

“You can see things are well set up for the second quarter,” said Malcolm Barr of JPMorgan.

However, Tuesday’s data provided the first look at spending in the quarter, and the evidence on the economy’s longer-term prospects was mixed.

A 1.5 per cent rise in total capital spending, probably mainly via business investment, boosted growth. But a 0.5 per cent increase in government spending and companies running down their inventories less quickly were also positive factors – neither of which can be relied on to continue for long.

A growing trade deficit meant that trade detracted from growth for a third quarter in a row, undermining hopes that export-led growth will help offset the coming fiscal squeeze.

“We keep hoping that improving net exports will help the economy rebalance but it is proving to be a frustrating wait,” said Howard Archer, economist at IHS Global Insight.

Economists pointed to a 2.1 per cent rise in nominal gross domestic product over the quarter – implying an annual growth rate of more than 8 per cent – as a sign that low interest rates and quantitative easing had helped the Bank of England succeed in its project of restoring demand in the economy. But they also emphasised that much of the increase in the cash value of spending had come through inflation rather than greater output.

“The big news was the huge jump in nominal spending which, although related to the VAT hike, suggests that quantitative easing has achieved one of its main goals,” said Jamie Dannhauser, economist at Lombard Street Research.

When the Bank began quantitative easing early in 2009, nominal GDP was falling at 5 per cent annualised but by the end of the first quarter of 2010 it was growing by 3.3 per cent annualised. The Bank’s rule of thumb is that in normal times nominal GDP needs to grow 5 per cent a year to meet the 2 per cent inflation target.

But the much higher inflation rate posed a problem for the Bank, which has consistently underestimated the pace of price increases over the past couple of years.

“It is a bold forecast to say that this is all going to disappear without the Bank doing anything, as they are currently forecasting,” said Robert Barrie, economist at Credit Suisse.