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EDINBURGH, July 5 (Reuters) - Scotland's economy grew at its fastest pace in more than two years in early 2017 and outpaced economic growth in Britain as a whole, propelled by the return to production of a steel plant, official data showed on Wednesday.
The Scottish economy expanded by a quarterly 0.8 percent in the first quarter of 2017, faster than Britain's overall growth of 0.2 percent and a sharp reversal from a contraction of 0.2 percent in the fourth quarter which had raised fears of recession.
The economy was powered by a 3.1 percent jump in industrial production, helped by the recovery of output at the Dalzell steel plate mill in Motherwell. The mill was bought by Liberty Steel from Tata Steel last year in a deal backed by financing from the Scottish government.
The news gives some relief for Scotland's pro-independence devolved government, which lost voter support in Britain's election last month and is under pressure to defend its record after a decade in power north of the English border.
Graeme Roy of the Fraser of Allander Institute economic research unit urged caution on the numbers.
"On balance, these data do not change the fact that the Scottish economy still faces a fragile outlook - particularly when you factor in likely effects of possible higher inflation and any Brexit uncertainty in the months to come."
In annual terms, Scotland's economy grew by 0.7 percent, slower than growth of 1.8 percent in Britain's economy, and has underperformed the rest of the UK for the past two years.
The Scottish government recently shelved plans to push for a new referendum on independence from the UK.
Support for secession among voters stands at around 45 percent, according to opinion polls, and how well or badly the economy fares is one the main drivers of separatist sentiment.
Wednesday's figures showed a rebound in output in industries linked to the North Sea oil and gas industry which the government said showed growing confidence in a sector that has slowed in recent years.
Scotland's economy has generally underperformed the British economy because of its dependence on oil and gas, and economists and business leaders have been calling for measures to broaden and deepen Scotland's economic scope.
"You have to ask whether it is desirable for the fortunes of a single industry to have such a large bearing on whether our economy grows," Andy Willox, the Scottish policy convener of the Federation of Small Businesses, said in a statement.
"We need to develop diverse local economies, so that a single local closure or industry challenge doesn't hit a community, or the entire country, for six." (Reporting by William Schomberg and Elisabeth O'Leary, editing by Andy Bruce and Mark Heinrich)