The UK economy has confounded experts in the past three months by growing at almost double the rate predicted.
Gross domestic product (GDP) in the quarter to June leapt 1.1pc, the most since the first three months of 2006, lifting sterling 1.2pc against the dollar. Economists had forecast just 0.6pc growth.
The surge was driven by a startling recovery in construction and the resilience of Britainâ€™s powerhouse services sector. It puts UK growth for the first half at 1.4pc â€“ already ahead of the Treasuryâ€™s own forecasts of 1.2pc for the full 12 months.
Capital Economics, which was predicting a 1pc annual increase, revised its position, describing the numbers as â€œa pleasant surpriseâ€ and saying: â€œThe figures suggest that growth in 2010 overall may now be closer to 1.5pc.â€
Although universally welcomed, the speed of growth reignited debate about the Chancellorâ€™s savage austerity measures to get the public finances under control. In the short term, the planned Â£40bn of tax rises and spending cuts are expected to soak up demand and kill off growth.
Shadow Chancellor Alistair Darling warned that the cuts could jeopardise the recovery and said the coalition â€œwill have to accept responsibility for the risks they are taking with the economyâ€. â€œThis is the final nail in the coffin of the Coalitionâ€™s argument that things are worse than they believed before the election,â€ Mr Darling added.
However, Treasury sources claimed that â€œnot tackling the deficit risks future growth more than not moving on itâ€. In a statement, George Osborne stressed that the Government would not be deterred, arguing that the strength of the private sector in the past three months indicated that the time is ripe to start slashing Britainâ€™s debt pile.
He said: â€œTodayâ€™s figures show the private sector contributing all but 0.1pc of the growth in the second quarter, and put beyond doubt that it is right to begin acting on the deficit now. While I am cautiously optimistic about the path for the economy, the job is not yet done. The priority now is to implement the Budget policies which support rebalancing and help ensure the sustained growth forecast this year and next.â€
Economists remain divided about the path to recovery. Some support the Governmentâ€™s plans to put the UK on a stronger long-term footing by grappling with the Â£927bn national debt. Others back Labourâ€™s approach, arguing Britain needs to grow its way back to stability before attacking the deficit.
Separate figures on the housing market provided a timely reminder that the recovery remains muted. The British Bankersâ€™ Association reported that mortgage approvals for house purchases fell to a four-month low of 34,813 in June from 36,418 in May, the second lowest level of since May 2009, and well below the 59,387 13-year average.
Net mortgage lending also moderated to Â£2.1bn in June from Â£2.5bn in May, below the six-month average of Â£2.5bn. Howard Archer, chief UK economist at IHS Global Insight, said the data â€œreinforce our suspicion that house prices will fall back by 3pc-5pc over the second half of 2010â€.
Drawing on concerns about the recovery, David Kern, chief economist at the British Chambers of Commerce, said: â€œWe must not forget that these positive results do not yet take into account the impact of the tough measures announced in the emergency Budget.â€
Similarly, Howard Wheeldon, senior strategist at BGC Partners, said. â€œThe UK economy is still in for some very tough times. From here on we expect to see increased signs of demand falling off â€“ this being particularly evidenced in the [fourth quarter] as the beginnings of public sector job cuts start to show.â€
The Office for National Statistics, which produced the data, said second quarter growth could have been even better were it not for the volcanic ash cloud in April. The transport services industry, including travel agents, suffered a 0.7pc contraction in the quarter as planes were grounded, wiping 0.1 percentage points off the overall growth number.
The big surprise, though, was the strength in construction, which posted 6.6pc quarterly growth in the quarter â€“ a level not seen since the second quarter of 1963. ONS statisticians said the figure was flattered by the 1.6pc decline in construction output in the first three months, which they put down to the bad weather. Manufacturing also performed better than it has for 11 years.
Britainâ€™s services sector, which accounts for 76pc of national output, posted 0.9pc growth due to strong performance in the market research and labour recruitment industries, as well as a recovery in commercial property lettings. It was the strongest performance since the first quarter of 2007.
The strong performance immediately raised the prospect of higher interest rates, but economists cautioned against any early move. Mr Kern said: â€œBusinesses are still facing huge pressures and it is important for interest rates to remain as low as possible for as long as possible.â€