-
Source: Reuters -
Related
Britain's economy has moved a step closer to recovery after data showing the service sector grew at its fastest pace in 17 months in July and a jump in factory output ignited hopes for a return to growth.
A day before the Bank of England takes a crucial decision on whether to inject more stimulus into the economy, the CIPS/Markit services PMI index rose to a forecast-beating 53.2 in July from 51.6 in June, the highest since February 2008.
The equivalent survey on manufacturing earlier this week showed activity in that sector grew in July for the first time since last March and together, the reports suggest Britain may now be emerging from recession after the second quarter's unexpectedly sharp 0.8% contraction.
Other official data on Wednesday showed industrial output rose at its fastest pace since October 2007, helped by a surge in car production. And there was evidence that the housing market decline may be tailing off from mortgage lender Halifax, which said house prices rose 1.1% in July and halved its forecast for house price falls this year to 7%.
The reports will give Bank of England policymakers plenty to think about at their two-day policy meeting starting today.
They face a tough call whether or not to extend their 125 billion pound asset purchase programme. Analysts are split over whether they will pump more cash into the economy or wait to gauge the effects of already extensive efforts to boost demand.
Gilt futures initially plunged and the pound jumped to a nine-month high against the dollar after the data, but contracts soon lost some ground as analysts wondered whether that would be enough to sway policymakers one way or another.
"Today's data has further boosted optimism on the prospect of recovery," said James Knightley, economist at ING.
"Nonetheless the key question for the BoE is whether these improvements are sustainable or are they just a correction following the collapse in confidence and activity in the wake of Lehman's demise last year."
Leading British think-tank, the National Institute for Economic and Social Research, reckons the economy shrank much less sharply at the start of the current quarter than in Q2, estimating a fall of 0.4% in the three months to July.
The pound hit a 23-year low of around $US1.35 in January but has since rallied, reaching a nine-month high against the dollar on Wednesday of over $US1.70 on the back of strong UK data and further optimism about bank earnings.
A Reuters poll on Wednesday saw sterling coasting around current levels over the coming year, holding on to recent gains against the dollar but strengthening against an embattled euro.
Prime Minister Gordon Brown's government, facing an election next year and lagging far behind opposition Conservatives in opinion polls, may take some heart from the figures though the polls also suggest the ruling Labour party will lose regardless of the state of the economy.
Cautious outlook
Analysts said it was yet to be seen whether the optimism coming through in the PMI surveys would be reflected in official activity data and said there was a chance the BoE could inject the 25 billion pounds still available to it into the economy.
The government gave the BoE licence to pump up to 150 billion pounds into the economy, although the central bank initially chose to limit itself to 125 billion.
Despite a pick-up in activity, the PMI surveys showed firms were operating below capacity and shedding jobs to curb costs.
Many economists reckon unemployment will keep rising fast and could even hit a rate of 10% next year, posing a major stumbling block to any recovery.
Tight credit conditions also pose a threat to growth and could hamper any housing market recovery, Halifax cautioned.
Its parent company Lloyds Banking Group reported a 4 billion pound loss in the first-half of 2009 due to a surge in bad debts from the HBOS business it bought earlier this year.
"Given still very tight credit conditions, poor economic fundamentals and the fact that affordability ratios are moving back up now, we suspect that house prices are highly likely to suffer relapses over the coming months," said Howard Archer, economist at Global Insight.
However, some companies which benefit from a buoyant housing market were more hopeful about their prospects.
"For the first time in two years I feel very encouraged about the future," said Philip Harris, chairman of floor coverings retailer Carpetright , which posted its first rise in sales in at least a year.
