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Growth unrevised at 9-year high in second quarter

LONDON (Reuters) - Britain’s economy expanded at its fastest pace in nine years in the second quarter of 2010 and growth at the start of the year was slightly stronger than previously thought, but analysts predict a tough road ahead.

A worker takes down scaffolding on a construction site in London August 27, 2010. REUTERS/Luke MacGregor

The robust expansion in the three months to June was bolstered by consumers using up their savings and a big rise in government spending ahead of a severe austerity drive which is likely to hamper the economic recovery.

The Office for National Statistics said on Tuesday the economy grew 1.2 percent in the second quarter, confirming an earlier estimate and in line with economists’ forecasts. First quarter growth was revised up to 0.4 percent from 0.3 percent.

That had little impact on financial markets, although sterling rose after separate data showed a surge in retail sales and that Britain’s current account deficit narrowed more than expected in the second quarter.

The economy has bounced back strongly from its deepest recession since World War Two but most economists expect growth to slow sharply when planned government spending cuts start to bite. There are also concerns about weak global demand.

“There are still very good reasons to be cautious over the sustainability of the economic recovery,” said Jonathan Loynes at Capital Economics.

As such, the Bank of England is expected to keep monetary policy extremely accommodative well into next year.

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However, the Confederation of British Industry said retail sales growth surged at its fastest pace in more than six years at the end of August and start of September, thanks to a bumper August bank holiday weekend.

And the International Monetary Fund said on Monday that the Conservative-Liberal Democrat coalition’s budget deficit reduction plans would support a “balanced recovery” even if growth was hampered at first.

A speech from new opposition Labour leader Ed Miliband will be closely watched later on Tuesday for his thinking on the best way to tackle a budget deficit running around 11 percent of GDP.

SAVINGS SLIDE

The GDP data showed consumers are running down their savings quite severely, boding ill for continued consumer spending. The household saving ratio fell to 3.2 percent in the second quarter from 5.5 percent in the first three months of the year, its lowest since Q3 2008.

Bank of England deputy governor Charles Bean said in an interview on Monday evening that the whole point of the bank keeping policy ultra-loose was to encourage consumers and businesses to spend in the short-term, rather than save.

“When the fiscal contraction hits households next year and when the public sector is likely to be shedding jobs, and job prospects become less certain, it’s very hard to see how households can do anything but retrench next year,” said Peter Dixon, an economist at Commerzbank.

Government spending grew by 1.0 percent on the quarter, its fastest rate since Q4 2008 and construction output surged 9.5 percent during the second quarter, its fastest rate of expansion since 1963 as it caught up after winter disruption.

Industrial production grew an unrevised 1.0 percent on the quarter and growth in services output was revised down slightly to 0.6 percent from 0.7 percent.

The second-quarter current account data showed that Britain’s deficit with the rest of the world narrowed to 7.383 billion pounds from an upwardly revised 11.298 billion pounds in the first quarter.

That was better than expected and reduces Britain’s current account deficit to 2.0 percent of GDP from 3.1 percent in the first quarter.

Editing by Patrick Graham

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