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British GDP growth at 3-year high, but investment falls

Flowers bloom outside the Bank of England in the City of London September 19, 2013. REUTERS/Suzanne Plunkett

By William Schomberg and Olesya Dmitracova

LONDON (Reuters) - Britain's economy grew at its fastest pace in three years in the second quarter, probably helped by a one-off tax change, but business investment fell, raising some questions about the recovery's prospects.

Growth between April and June was 0.7 percent compared with the previous three-month period, in line with the previous reading, the Office for National Statistics said on Thursday.

Sterling fell and British government debt prices rose after the data that also showed a wider-than-expected current account deficit. Most economists had predicted quarterly economic growth would remain unchanged but some had said it might be revised up.

"We are starting to recover but we are not in the nirvana of broad-based growth yet," said Rob Wood, an economist with Berenberg Bank in London.

"It looks a little more fragile than in the last set of data, which showed a strong net trade contribution, whereas now the emphasis is back on fragile things like stock building and areas which won't persist like government investment," he said.

Revisions to growth over the past year meant the 0.7 percent growth rate was the strongest quarterly expansion since the second quarter of 2010.

In year-on-year terms, growth was 1.3 percent, down from the previous estimate of 1.5 percent.

British households saw their disposable income and savings rise, a turnaround from recent quarters.

Compensation of employees - which includes bonuses as well as pay - jumped 2.9 percent from the January-March period, the fastest increase since 1989.

Economists had predicted that income and savings would rise after some companies held off on paying bonuses until April in order to benefit from a reduction of Britain's top tax band.

But business investment plunged 2.7 percent in the second quarter, compared with a previous reading of a 0.9 percent rise.

"It was disappointing to see business investment revised down markedly," said Howard Archer, an economist with IHS Global Insight. "There are hopeful signs in the latest surveys though that companies are starting to lift their investment intentions."


The ONS revised down GDP readings in the third and fourth quarters of 2012 and said full-year growth last year now stood at 0.1 percent, down from an earlier estimate of 0.2 percent.

Growth in the first quarter of 2013 was revised up to 0.4 percent from 0.3 percent.

In the second quarter of this year, construction and industrial output both grew at their fastest pace in three years. Growth in Britain's giant services sector was 0.6 percent, the same as the first quarter.

Britain's recovery is widely expected to have gathered further speed in the third quarter, with the quarterly growth rate rising to about 1 percent, many economists say.

The surprise recovery in recent months has made Britain one of the fastest-growing advanced economies, although the economy remains 3.3 percent smaller than in early 2008, before it sank into recession as the financial crisis struck.

Earlier this year, the prospect of a return to recession hung over the country but now analysts say the economy is probably growing at an annualised rate of around 3 percent.

The ONS released second-quarter current account data, which showed that Britain's deficit with the rest of the world narrowed to 13 billion pounds from nearly 22 billion in the first three months of 2013. Economists had expected a current account gap of 12.0 billion pounds.