Pick-up in UK industry signals fragile economic recovery

LONDON Tue Apr 9, 2013 1:36pm BST

Heated coke is transported to be quenched by water at the SSI steel plant at Redcar, northern England May 29, 2012. REUTERS/Nigel Roddis

Heated coke is transported to be quenched by water at the SSI steel plant at Redcar, northern England May 29, 2012.

Credit: Reuters/Nigel Roddis

LONDON (Reuters) - British industry bounced back surprisingly strongly in February, pointing to a nascent economic recovery that may nonetheless need more help from the central bank to gather pace.

A 1 percent rise in industrial output from January lifted production in February slightly above its average level in the last quarter of 2012 when the economy shrank.

The data, released on Tuesday by the Office for National Statistics, allays fears of another contraction in the first quarter of this year, which would tip Britain into its third recession in less than five years.

However, evidence such as this does not remove the need for more quantitative easing through bond purchases by the central bank, according to Paul Fisher, a Bank of England policymaker.

Fisher said the bank's Funding for Lending Scheme was improving conditions for borrowers, but the economy still needed other help until that scheme got up to full steam.

"We need some sort of background level of QE to see us through this period, particularly while FLS has its full impact for the remainder of this year," he told a newspaper.

Fisher and two other policymakers voted for 25 billion pounds of extra gilt purchases in February and March, on top of the 375 billion pounds bought so far to pump money into the economy.

The pound rose to within sight of a 1-1/2 month high against the dollar after the industrial output data spurred some cautious optimism that Britain might avoid renewed recession.

APOCALYPSE AVERTED?

February's strengthening in industry, which late last year was the main drag on the economy, was led by a 0.8 percent rise in manufacturing output, as well as by higher demand for energy during the unusually cold month.

"If the level of (industrial) production remains the same in March, then over the first quarter as a whole industrial production will have risen by 0.1 percent," said David Tinsley, economist at BNP Paribas.

"These apocalyptic stories of a negative (first quarter GDP) print and a triple dip (into recession) are ... certainly not guaranteed," he added.

Industrial output was boosted partly by the biggest rise in the production of electricity and gas since October, due to an average temperature during February 0.9 degrees Celsius below its long-term norm.

It is also likely that continued cold weather supported industrial activity in March, economists said.

The first official estimate of how Britain's economy fared in the first quarter will be released on April 25.

Until then, the prospect of return to recession hangs in the balance. While a survey of purchasing managers showed manufacturing activity shrinking in March, alongside a risk of weak construction output during the quarter, there are some signs of a recovery.

A survey out overnight showed that the FLS was helping Britain's housing market, with sales at their highest level in three years and prices broadly stable.

Resilience in the retail sector adds to optimism, as sales kept growing in March despite the cold weather.

However, ONS data also released on Tuesday showed Britain's goods trade deficit grew much more than expected in February to reach its biggest since August at 9.4 billion pounds, mainly due to sluggish exports to other European Union countries.

(Additional reporting by Kate Holton and Peter Griffiths; Editing by Ruth Pitchford)