Q1 GDP revised up slightly

A woman walks past a shop window displaying 'sale' signs on Oxford Street in central London, January 2, 2010.

LONDON (Reuters) - Britain's economy grew slightly faster than initially estimated in the first three months of this year after a rebound in manufacturing and business services, but economists expect headwinds to come.

The Office for National Statistics said the economy grew by 0.3 percent in the first quarter, up from an initial estimate of 0.2 percent.

However this rate of growth is a touch slower than the 0.4 percent in the fourth quarter of 2009 and is less than half typical rates experienced in 2006 and 2007, before Britain suffered its worst recession since at least World War Two.

On the year, output was down 0.2 percent -- again an upward revision and its smallest decline since the third quarter of 2008.

Both revisions were exactly in line with the consensus expectation of private-sector economists, who had revised up their view following strong industrial output data for March.

"No huge surprises here," said Philip Shaw, UK economist at Investec. "The uprating of industrial production had already been flagged by the monthly figures."

Britain's finance ministry -- which plans a major spending squeeze under the newly elected Conservative/Liberal Democrat coalition -- said the upward revision was welcome, but noted output was still 5.5 percent below its pre-recession peak.

Sterling and British government bond prices were little changed on the news.

A breakdown showed that industrial production rose by 1.2 percent on the quarter, its largest rise since the first quarter of 2006. Business services and finance grew by 0.7 percent, their strongest pace since the first quarter of 2008.

However household spending showed no growth on the quarter and general government spending grew by just 0.5 percent, its slowest in a year.

There was a sharp 0.7 percent fall in hotels, distribution and catering output, which economists blamed on unusually snowy weather at the start of the year and a rise in value-added tax.

"This was an okay quarter, given we know there were obstructions such as snow and the VAT hike which have clearly held back consumption," said Alan Clarke, UK economist at BNP Paribas.

Some economists interpreted the lack of growth in household expenditure as a sign that the British economy was rebalancing towards export-driven growth, unlike the pre-recession boom which had been driven by consumer spending.

The data confirmed upward inflation pressures shown in consumer and producer price data this year. The implied GDP deflator -- a measure of price pressures across the economy as a whole -- rose by 1.7 percent on the quarter, more than double the rate in the fourth quarter of last year and the biggest increase since 1996.

Year-on-year, the deflator showed a 3.6 percent rise in prices, and wages rose at a quarterly pace of 1.2 percent, their fastest in two years.

The growth figures confirm economists' views that Britain is recovering from an 18-month recession that knocked more than 6 percent off economic output. However, there are headwinds to come, not least from ongoing debt market turbulence in the euro zone, Britain's biggest trading partner, and a sharp squeeze on public spending.

"We continue to look for only very weak growth in coming quarters," said James Knightley at ING.

"Our pessimistic assessment is based on poor household fundamentals and aggressive fiscal policy tightening, while financial market weakness is also a concern."

(Editing by Ron Askew)