Bullish consumer spending growth ensured that the economy continued its confident expansion in the third quarter despite weakness in manufacturing, official figures showed yesterday.

The latest estimate of GDP growth gave ammunition to hawks on the Bank of England’s Monetary Policy Committee who argue that an expected cut in interest rates should not come this side of Christmas.

The data showed that spending by consumers rose 1 per cent in the third quarter, the strongest figure since the end of last year, and was up by 3.5 per cent year on year.

Overall, GDP grew by 0.7 per cent, a downward revision from the 0.8 per cent initial estimate but still a figure that implied that the economy grew above its long-run average.

Over the year growth hit 3.2 per cent, the strongest figure since the fourth quarter of last year, the Office for National Statistics (ONS) said.

Manufacturing output was flat over the quarter and mining and quarrying fell by 1.3 per cent because of maintenance and repair work at oilfields. However, services expanded by a healthy 0.9 per cent.

Financial and business services – the engine of Britain’s economy, and the sector most exposed to the sub-prime mortgage crisis – grew by 1.5 per cent, down from 1.7 per cent in the second quarter.

The ONS said that the credit squeeze had hit output in the sector, although that was offset by a surge in the volume of financial transactions on the stock exchange.

The figures also revealed a surge in capital spending by the public sector, which pushed up overall investment by 1.6 per cent despite investment by businesses remaining flat during the quarter.

In addition, they showed that net trade was a drag on growth in the third quarter of 0.5 per cent. This was a worrying sign for the Treasury, which is banking on a rebound in the terms of trade in 2009 in order for the economy to recover in line with its forecasts.

Jonathan Loynes, of Capital Economics, said: “Looking ahead, it seems pretty clear that growth will slow in the fourth quarter and beyond.

“The news on retail sales suggests that household spending growth is very likely to slow and recent sharp increases in inventories may well go into reverse.”

In an encouraging piece of news for the Bank, the ONS said the implied level of inflation across the whole economy fell to 2.6 per cent from 3.7 per cent in the second quarter. It was the lowest reading since the second quarter of 2006.

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