Economy growing but troubles lie ahead

The National Institute for Economic and Social Research (NIESR) said its estimated quarter-on-quarter hike in gross domestic product was "the first real indication that the economy is growing at around its trend rate".

NIESR's May calculation comes after it said GDP rose 0.7 per cent in the three months to April. But the group warned that severe Government austerity measures to cut the public debt could hamper the recovery.

The debt crisis across Europe could also knock UK growth, with a strengthening pound adding to export pressure, according to NIESR.

It said that, while there had been "a clear improvement to UK growth", there are "a number of factors which will impede growth in the coming months".

NIESR said the UK was now in a period of "depression" – a period when output is depressed below its previous peak.

"We do not expect output to pass its peak in early 2008 until 2012," it said.

Its estimates come ahead of the inaugural forecast from Chancellor George Osborne's newly created Office for Budget Responsibility on Monday at the start of a busy week for economic figures.

The OBR has been tasked with providing an independent assessment of projections on the economy and public finances and to produce its own for the emergency Budget on June 22.