A surprise rebound in household spending in the first quarter confounded City expectations of a sharp slowdown in consumer demand but failed to prevent the economy growing at its weakest pace for three years.

Official figures this morning confirmed initial estimates that the economy grew at a lacklustre rate of just 0.4 per cent in the first quarter (Q1), down by a third from its 0.6 per cent pace in the previous two quarters.

The slowdown came as growth was hit by the sharpest fall in investment spending by companies and the public sector for five years, with this falling by 1.6 per cent in Q1.

Growth was also hit by weakness in industrial production, which fell by 0.2 per cent in Q1, as manufacturing grew by a modest 0.3 per cent but output from utilities fell sharply by 1.3 per cent.

The bounce back in consumer spending in today’s data was the big surprise, with the figures showing that this rose by a robust 1.3 per cent in Q1, after an anaemic increase of only 0.1 per cent in the previous three months.

The strength of the household demand indicated by the official numbers chimed with surprisingly strong official retail sales figures for March and April but continued to raise eyebrows in the City.

With a wealth of survey evidence suggesting consumer demand has weakened more substantially, both City economists and the Bank of England are concerned that the official figures have yet to reflect this and are partly discounting them as a result.

The Office for National Statistics said that the strong consumption activity shown in its estimates partly reflected buoyant demand for lottery tickets fuelled by big jackpots and strong sales of cars.

The City also raised questions over the estimate that growth in the financial services sector was a very strong 5.2 per cent in the first quarter, despite the toll on City activities from the credit crunch.

Growth in the broader business services and financial sector was a weak 0.4 per cent, however, contributing to the weakest performance for the services sector as a whole for three years, with this expanding by only 0.5 per cent.

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