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New figures give glimmer of hope for British economy


Latest update : 2009-06-10

British industrial output rose for the first time in more than a year in April, raising the prospect that the country's recession may have reached an end. But policymakers urged caution about getting too carried away with expectations.

REUTERS - British industrial output rose for the first time in over a year in April after a jump in oil and pharmaceuticals production, raising the prospect that the economy could already be out of recession.

But policymakers have urged caution on getting carried away with expectations of a strong recovery, especially because banks remain reluctant to lend -- the Bank of England's Kate Barker says interest rates will remain low for some time to come.

The Office for National Statistics said industrial output, which contributes 18 percent to gross domestic product, rose 0.3 percent on the month -- the first increase since February 2008 and better than the 0.1 percent decline economists had expected.

"The ... figures generally bode well for a recovery in the economy and it's quite feasible that GDP will have posted a gain over the second quarter," said Philip Shaw, economist at Investec.

Services PMI data covering about 38 percent of GDP pointed to a return to growth for the sector in May, and Britain will be the first major industrialised nation to emerge from recession if there is overall GDP growth between April and June.

But there are doubts about the sustainability of any recovery.

BoE policymaker Barker, in an interview published earlier on Wednesday, said a rise in manufacturing orders could reflect temporary restocking by firms.

"Manufacturing orders are starting to come back, but whether that's a stocking issue or a turn-up in final demand isn't so clear," she told the Leicester Mercury newspaper.

The BoE cut interest rates to a record low 0.5 percent in March and just this week announced plans to broaden its 125 billion pound ($204.9 billion) quantitative easing programme to help firms find working capital.

"Our present view is that we think (interest) rates could stay low for quite some time," said Barker.

Political boost

The rise in industrial production was hailed by Britain's Labour government, whose hopes of avoiding heavy defeat in a national election due within a year rest on convincing the electorate that it has turned around the economy.

"There are signs that the government's actions to support the economy through this difficult downturn are having an effect but ... there are absolutely no grounds for complacency," Prime Minister Gordon Brown's spokesman said about the data.

The rise in industrial output was driven by a 2.5 percent monthly increase in oil and gas extraction after a 2.7 percent drop in March, as well as production of cars, up 8.5 percent, and of pharmaceuticals, up 5.5 percent.

March industrial output was revised up to a 0.3 percent contraction from 0.6 percent, though the ONS said this was not enough to boost first-quarter GDP, which shrank by 1.9 percent.

Manufacturing, which excludes resource extraction figures in the industrial output data, grew by a bigger-than-expected 0.2 percent in April from an upwardly revised 0.2 percent in March -- the first rise since February 2008.

"Much of this reflects the turn in the stocks cycle and there remain questions over the recovery in final demand, which is significant because the inventory effect is only likely to last one or two quarters," said Investec's Shaw.

"So the jury's still very much out on the strength or the shape of the medium-term recovery in the economy," he added.

A recovery in global demand for British exports and a return to more normal bank lending conditions are seen as key for longer-term growth, and economists also identified a continuation of sterling's current rally as bad for growth.

Sterling fell to a record low against the currencies of its main trading partners <=GBP> on Dec. 30, but has since strengthened by more than 13 percent to a six-month high, pushing up the cost of British exports.

A stronger currency also makes imports more attractive to British consumers. Trade figures also released by the ONS on Wednesday showed that Britain's goods and services trade gap swelled to 3.014 billion pounds in April from 2.716 billion pounds in March, its biggest since September last year.

"The rise in imports in April may well be another sign that domestic demand is beginning to firm," said Howard Archer, chief UK economist for IHS Global Insight.

Date created : 2009-06-10