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UK economy records fastest growth in 6 years

Tuesday, 28 Jan 2014 | 4:31 AM ET
UK GDP to slow: Economist
Melanie Baker, U.K. economist at Morgan Stanley expects U.K. GDP to "calm down" over the next couple quarters and says a rate rise is still "more of a 2015 event."

The British economy recorded its fastest annual growth rate since the start of the financial crisis in 2013, with full-year growth up 1.9 percent from just 0.3 percent in 2012.

While this is the highest annual growth rate since 2007, growth in the fourth quarter did slow to 0.7 percent, down from 0.8 percent in the previous three months. The figure was in line with forecasts and year-on-year, the economy grew 2.8 percent in the fourth quarter.

Detailing the figures, the Office of National Statistics (ONS) said that output increased in three of the four main industrial groupings - agriculture, production, and services - while output in construction decreased in the fourth quarter by 0.3 percent, hence the dip in GDP between the third and fourth quarters of 2013.

(Read more: UK economy seen growing at fastest pace since 2007)

Growth of 0.7 percent between October and December was still estimated to be 1.3 percent below the peak in the first quarter of 2008.

U.K. Prime Minister, David Cameron, responded to the figures with a tweet emphasizing that his government's austerity plan was working:

Also responding to the data, John Longworth, the director general of the British Chambers of Commerce (BCC), sounded a similarly positive tone but mixed it with added caution.

"It is of course heartening that Britain is now amongst the fastest-growing advanced economies," he said, adding: "But more must be done to shore up the foundations of this recovery if it is to be a lasting one.

We mustn't pat ourselves on the back for a recovery that is merely good, when what we need is a recovery that is truly great."

(Read more: UK manufacturers upbeat for 2014)

Simon Dawson | Bloomberg via Getty Images

Still, 1.9 percent growth for 2013 signals a remarkable turnaround from a year ago.

It was only last April that the U.K. government's austerity policies were being singled out by the International Monetary Fund (IMF) for criticism. The organization predicted then that the U.K. economy would grow by only 0.7 percent in 2013.

However, there has been a string of upbeat data in recent months. Unemployment fell to 7.1 percent in the three months to November, the lowest level since 2009, while inflation met the 2 percent target set by the Bank of England in December; the first time since November 2009.

(Read more: IMF upgrades world growth forecast to 3.7% in 2014)

This caused the IMF to update its growth forecast for the U.K., with the organization now predicting that growth would average 2.25 percent in 2014-15.

What next from Carney?

The renewed rate of stronger growth will fuel speculation about when the Bank of England will raise record-low interest rates.

When Mark Carney took over the reins of the Bank of England (BoE) from Mervyn King in July 2013, he soon announced that the central bank would not raise interest rates until U.K. unemployment hit 7 percent. Back then, it stood at 7.8 percent.

However, there has been speculation recently that Carney's policy might be unraveling, with unemployment just 0.1 percent away from his target, and now with strong GDP figures.

Carney did reiterate on Friday that while the bank's forward guidance policy could evolve, it was not in any hurry to hike rates, following the widespread speculation.

—By CNBC's Kiran Moodley. Follow him on Twitter @kirancmoodley

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