UK economy pulls out of 18-month recession faster than previously thought

Britain's economy emerged from an 18-month recession at the end of last year in better shape than previously thought, although analysts still anticipate a treacherous path to sustainable growth.

But the better-than-forecast growth may provide some cheer to the Labour government, facing possible defeat in an election expected on May 6 and banking on an economic recovery to help improve its popularity after the worst downturn on record.

The Office for National Statistics said gross domestic product grew 0.4 per cent in the last three months of 2009, above forecasts for an unrevised reading of 0.3 percent growth and the first quarter of growth since the start of 2008.

"Looking ahead, the first quarter looks uncertain," said Philip Shaw, chief economist at Investec. "But we are still pencilling in a positive GDP figure.

"It remains the case that the economy is fragile and still requires a large degree of policy accommodation to enable it to gain traction."

Sterling rose on the surprisingly strong data, but markets still expect monetary policy to remain extremely loose for some time to come and the government warned against complacency given weakness in the eurozone, the country's biggest trading partner.

"While it is welcome to see an upward revision, recent data in the EU and elsewhere have highlighted that there are still risks and uncertainties to this recovery," said a Treasury spokesman.

While Britain was stuck in recession for longer than some of its European neighbours, the return to growth on the continent has proved to be patchy.

Separate data showed the current account deficit narrowed sharply in the fourth quarter to £1.684 billion from £5.912 billion, the lowest since the first quarter of 2008, after earnings on investment abroad hit their highest since records began in 1964.

Year-on-year, GDP contracted by 3.1 per cent, less than the 3.3 per cent previously reported and much less sharply from the 5.3 per cent drop in the third quarter.

The statistics office said the upward revision to the GDP data was due to a combination of higher services, construction and agriculture output.

The peak-to-trough fall in output during the recession remained at 6.2 per cent, the biggest since comparable records began.

Much of the growth in the final quarter of last year came from public spending and the inventory cycle, both of which are unlikely to be supportive for much longer.

While Labour does not plan to start cutting government spending to reduce a record budget deficit until 2011, the Conservatives - who could be in government come May - have said they would get to work this year.

The opposition also wants to go further than halving the deficit - currently nearly 12 per cent of gross domestic product - over four years as Labour has pledged.

"The risks of a double dip (recession) are fairly modest," said Ross Walker, an economist at RBS. "But there are still some significant headwinds."

The Bank of England, which slashed interest rates to a record low of 0.5 per cent and spent £200 billion of newly-created money on assets to support the economy, has said the future path of monetary policy will partly depend on the nature of any fiscal tightening.