The ongoing retail boom, and a revival in factory output, has helped the UK economy post its strongest growth for more than two years.

The economy expanded by 0.7% in the July to September period, the Office of National Statistics (ONS) said.

The increase is slightly greater than the market expectations, but one shouldn't get too excited,

Philip Shaw, economist, Investec

The figure, which compared with 0.6% growth during the previous quarter, was stronger than analysts had expected.

But the ONS warned that the economic output, or GDP, data was flattered by comparison with a previous quarter affected by bank holidays.

"Without this effect, GDP growth in the second quarter would have been higher and in the third quarter would have been lower," said the ONS.

Year on year, the economy grew by 1.7%, Friday's report said.

Interest rate implications

The economy was boosted by a strong performance from the retail and hotel and catering sectors, the ONS said.

Manufacturing output also increased, rising for the first time in 18 months.

And post and telecoms sectors reported "relatively strong growth".

The strength of the rebound was seen as relieving pressure on the Bank of England to, at its November meeting, reducing interest rates in an effort to promote economic expansion.

Analysts for their part expected the data to influence the Bank of England's interest rate policy.

"The stronger than expected performance may just tilt in favour of a no-change outcome [at the November meeting]," said Audrey Childe Freeman, economist at Canadian Imperial Bank of Commerce.

Three of nine members of the Bank's rate setting committee voted for a rate cut at the October meeting, minutes revealed.

The Bank has left interest rates at 4.0% for the last 11 months, their lowest level for 38 years.

Tax warning

But David Frost, the director general of the British Chambers of Commerce, while called the data "good news for the UK", warned that, based on these figures, the country would miss the Treasury's growth target for the year.

This in turn would make it difficult for Chancellor Gordon Brown to finance his spending plans, Mr Frost said.

"Business is already bracing itself for the national insurance rise due next April.

"Any new increase in tax will further erode the UK's competitive advantage, already under pressure from the growing red tape burden."

Caution urged

Philip Shaw, economist at Investec, warned against an overexuberant response to Friday's data.

"The 0.7% increase is slightly greater than the market expectations, but one shouldn't get too excited," Mr Shaw said.

"It is only the level of growth that the government believes to be the long term trend.

"The figures overall have been boosted by the large rebound in manufacturing after the Golden Jubilee holiday in June."

Fridays' data will be twice reassessed by the ONS until be accepted as final statistics.