GDP growth at 9-year high in Q2 but slowdown looms

Strong construction activity caused the Office for National Statistics to boost its initial estimate of 1.1 percent GDP growth for the three months to June to 1.2 percent, against expectations for an unchanged reading.

The upbeat data follows strong August retail and industrial orders surveys, suggesting that Britain's recovery from its deepest recession since World War Two had not wholly run out of steam. Growth was 0.3 percent in the first quarter.

No economists expect a repeat of what was the strongest expansion since the first quarter of 2001, with the debate now focussed on whether UK growth will just slow towards its trend of about 0.6 percent or slump in the face of a global downturn.

The expenditure breakdown of GDP shows that the recovery is built on very fragile foundations, said Samuel Tombs of Capital Economics. Total investment posted a larger than expected fall, while net trade made no contribution to GDP growth.

Financial markets have increasingly been pricing in a weak growth outturn for 2011 due to a lacklustre U.S. economy and looming public spending cuts across Europe, not least in Britain where most government departments' budgets are set to fall by a quarter over four years.

Ed Balls -- a confidante of former prime minister Gordon Brown and a contender for the leadership of the opposition Labour Party -- warned in a speech on Friday that Britain faced an economic hurricane.

GROWTH SUSTAINABLE?

Economists also saw risks to Britain's growth prospects in the latest data.

Industrial production grew 1.0 percent in the second quarter, matching the four-year record achieved in the first. Services growth rose to 0.7 percent from 0.3 percent while construction output surged by 8.5 percent after a 1.6 percent fall.

However, a breakdown of how this growth was achieved showed it relied heavily on higher consumer and government spending as well as businesses rebuilding stock levels after the recession -- all factors that are likely to prove unsustainable.

Household consumption rose by 1.1 percent, its fastest since just before the start of the recession, and government spending was up by 0.3 percent, though the gain was less than the 1.5 percent rise seen in the first quarter.

Both sectors are very unlikely to maintain such growth rates as the fiscal squeeze kicks in over the coming quarters, said Capital Economics' Tombs.

Firms also increased inventory levels for the first time since Q3 2008, but longer-term investment to boost productivity fell by a sharp 2.4 percent and the excess of imports over exports barely narrowed.

The gain in construction was the biggest since 1982, but is viewed as a one-off after work scheduled for the first quarter was postponed to the second due to Britain's harshest winter in around 40 years.

The services data was downwardly revised from an initial estimate of 0.9 percent -- largely as a result of more detailed data showing the effect of April and May's ash cloud

The second quarter is still likely to represent the high point of quarterly growth as fiscal tightening and a renewed slowdown in global activity constrains a more robust recovery, said Hetal Mehta, an economist for Daiwa Capital Markets.

The zero contribution from net trade is disappointing and questions how much the UK can rely on an export-led recovery.

Sterling was half a cent lower against the dollar after the figures because some traders had bet on an even bigger upward revision, but gilt futures were little moved as the data showed little to alter the outlook for monetary policy.

(Editing by Mike Peacock, John Stonestreet)