Services sector helps economy beat forecasts in third quarter

The economy grew faster than previously thought over the summer, providing a last-minute boost for Chancellor Gordon Brown ahead of his pre-Budget report yesterday.

Growth in GDP over the three months to September was revised up to 0.8 per cent, its fastest rate for two years, from the first estimate of 0.7 per cent.

The increase, which took some City banks by surprise, was driven by higher estimates for growth in the services sector.

The revision takes the annual rate of growth up from 1.7 to 1.8 per cent, saving some of Chancellor's blushes but still well adrift of his April Budget forecast of between 2 and 2.5 per cent.

Ross Walker, UK economist at Royal Bank of Scotland, said: "The upward revision is encouraging, demonstrating that demand remains resilient against a hostile global environment."

The breakdown of the figures confirmed that the UK economy is heavily dependent on domestic demand. Domestic demand rose by 1 per cent compared with the second quarter's 0.3 per cent fall. Within this consumer spending rose 0.8 per cent – albeit slower than the second quarter's 1.4 per cent – while public spending rose 1.3 per cent.

But the global economic downturn continued to hurt the business sector. Exports volumes tumbled by 1.7 per cent, capital investment slumped by 2 per cent and corporate profits fell by 0.2 per cent.

The exception to this picture of imbalance within the economy was provided by 1.1 per cent growth in manufacturing – its best quarter for three years.

However some analysts were sceptical about the permanence of this revival, pointing out that much of it was driven by a bounceback following the factory shutdowns for the golden jubilee and World Cup.

Figures from the high street banks yesterday highlighted the contribution households were making to overall economic growth. Homebuyers took on a record £14.6bn of mortgage debt in October, confirming the Bank of England's fears that house-price inflation might still not have peaked.

The real worry for the Bank will be £5.6bn of equity withdrawal – homeowners remortgaging their homes to get at their cash gain. This was another record, according to the British Bankers' Association, and tends to fuel inflationary consumer spending sprees.

The Consumer minister, Melanie Johnson, warned that the rising level of consumer debt could become a serious problem if people stopped being able to afford repayments.

Her comments followed the publication of a Department of Trade and Industry study showing 6 per cent of households spend half or more of their pre-tax income on paying back debt.

The study also found that one in 20 British households spend 25 per cent or more of their income just on paying back consumer credit commitments.