Consumers defied growing economic gloom to raise spending by a surprisingly strong 1.3 per cent in the first quarter, confounding City predictions and helping to shore up growth, official figures showed yesterday.

The unexpected rebound, after a meagre rise of only 0.1 per cent in the previous three months, helped to offset the drag on growth from a sharp slowdown in the services sector and the biggest fall in corporate and public investment for five years.

However, all this failed to prevent the economy expanding at its weakest pace for three years. GDP grew 0.4 per cent in the first quarter (Q1), down from 0.6 per cent in the previous two quarters.

The renewed consumer spending will deal a further blow to chances of further cuts in interest rates over the summer.

Economists said that with consumer demand still severely exposed to the credit crunch, sliding house prices and weak income growth, consumer demand was set to weaken in the rest of the year, leaving the economy vulnerable to a still sharper downturn.

Growth was already down in the first quarter as services, the economy's dominant sector, expanded by only 0.5 per cent, in the weakest performance for three years. Investment spending fell by 1.6 per cent, as worsening prospects led to companies curbing capital projects in anticipation of low demand. Profits of the corporate sector fell by 1.2 per cent in the first quarter, after a 3.3 per cent rise in the previous quarter.

A further blow came from industrial production, which slipped by 0.2 per cent in Q1. Manufacturing's performance was downgraded, with output up by only 0.3 per cent in Q1, revised down from a 0.5 per cent estimate.

Although the foreign trade performance added 0.3 percentage points to Q1 growth, this was mainly because of falling imports rather than stronger exports. Despite a falling pound, exports failed to increase in the quarter.

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

With much survey evidence suggesting that consumer demand has weakened more substantially, economists and the Bank of England think that the official figures are behind trends and are partly discounting them.

The Office for National Statistics (ONS) 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.

Some economists, such as Stephen Lewis of Monument Derivatives, argued that the surveys of retail activity may not be quite as inconsistent with relatively strong official data as observers have argued. Mr Lewis noted that the chief sign of consumer weakness in the closely watched survey from the British Retail Consortium, for example, mainly reflected “like-for-like” sales, which adjust for retailers adding extra trading floor-space, while total sales were stronger.

Yesterday's figures did point to some fragility in consumer demand, however, with growth in the hotels and restaurants sector, which is prey to consumers reining-in spending, dropping to zero in Q1.

Yet the GDP data also showed surprising resilience in the financial services industry, which notched up healthy first-quarter growth of 5.2 per cent. The ONS said that this was driven by buoyant capital market activity, with a high volume of stock market transactions.

More signs of weakness in services, the engine room of the economy, also emerged in separate monthly official figures yesterday, which estimated that the sector contracted by 0.1 per cent in March, the chief weakness again emerging in business services and finance.

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