The UK economy grew faster than originally thought between July and September, lifted by a buoyant service sector.

UK economy on top

UK +0.8% Germany +0.3% Italy +0.3% France +0.2% Jul-Sep 2002

The Office for National Statistics said it had revised its estimate of economic expansion during the period from 0.7% to 0.8%, the UK's fastest quarterly growth rate in more than two years.

The higher quarterly figure pushed annual growth for the three months to September to 1.8%, up from an initial reading of 1.7%.

The upwards revision took forecasters by surprise, with most City analysts predicting no change.

Transport thrives

The increase reflected stronger than expected growth in the economically dominant service sector, which is now estimated to have expanded by 0.9% during the quarter, up from an initial figure of 0.8%.

Growth in the service economy was driven principally by the transport, telecoms and finance sectors.

But the manufacturing sector also showed surprise strength, with growth in factory output pegged at 1.1%, its first quarterly increase since the final three months of 2000.

Within the manufacturing economy, the paper, printing and chemicals industries posted the strongest rate of expansion.

Funding gap

Analysts said that the while the figures suggested the economy was in better than expected shape, annual growth remained unlikely to meet the government's forecasts.

"We expect the fourth quarter to show a weaker number. It would have to be a really big number if (Chancellor) Gordon Brown's forecasts for the full year are to be met," said George Buckley at Deutsche Bank.

Mr Brown, due to unveil his pre-Budget report later on Wednesday, is widely expected to announce an increase in government borrowing to plug a gap in tax revenues as economic growth falters.

The economy's surprise show of strength is also expected to reinforce the case against cutting interest rates.

Rates dilemma

The Bank of England has kept borrowing costs on hold at 4% for the last year, despite growing pressure for a reduction to reinvigorate the faltering manufacturing sector.

Senior Bank of England officials have said a rate cut could fuel further house price increases, increasing the risk of a property market crash.

The UK economy, hit by sluggish growth in the US and the eurozone, is expected to grow by about 1.5% this year, compared with government forecasts of up to 2.5%.