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Britain’s economy continues to power ahead in Q1

The Office for National Statistics said the economy grew by an unrevised 0.7 percent in the first three months of the year, the same heady pace as the past two quarters. The annual rate was revised up by a tenth of a percentage point to 2.9 percent, just below the 3.0 percent rate of the previous quarter.

Financial markets showed little reaction to the figures which reinforced expectations that the Bank of England would raise interest rates again in the coming months.

“The robust performance of the economy means the Bank of England will not be deterred from raising rates further to combat inflation,” said Richard Snook, an economist at the Centre for Economics and Business Research.

The central bank raised interest rates to 5.5 percent earlier this month, taking them to the highest level in the Group of Seven major economies.

Futures prices show investors expect rates to rise to 5.75 percent this summer and probably to 6 percent by the end of the year.

Inflation pressures

The latest data showed the implied GDP deflator -- a measure of price pressures in the economy -- recorded an annual rate of 3.2 percent -- the highest since the fourth quarter of 2003.

This is unwelcome news for Bank of England policymakers who have become increasingly worried about the strength of underlying inflation pressures.

In an interview with Newcastle newspaper The Journal, Andrew Sentance, one of the more hawkish members of the bank’s Monetary Policy Committee, reiterated his concern that firms’ pricing power could feed into a broader rise in inflation.

Continued strength in financial services drove growth. Output from the financial intermediation sector expanded by 4.7 percent on the quarter, lifting the annual rate into double-digits.

The effect of bonuses in the sector was also seen in a hefty 2 percent quarterly rise in employees’ compensation, the highest rate since the final quarter of 2004.

Consumer spending, however, slowed from the strong pace seen at the end of last year as rising mortgage repayments ate into households’ disposable income.

With interest rates still on a upward path, analysts said this slowdown was likely to continue for some time.

“We expect growth to lose a little momentum during the coming months as the upside for consumer spending is limited by higher interest rates, modest real disposable income growth and rising debt levels,” said Howard Archer at Global Insight.