May 6, 2009 / 1:34 PM / 11 years ago

Data hints economy nearing trough

LONDON (Reuters) - Hopes that Britain may have come through the worst of its recession rose on Wednesday after data showed the decline in services activity slowed markedly, consumer confidence picked up and the jobs market decline eased.

Pedestrians walk past Britain's Bank of England in London, April 9, 2009. REUTERS/Stefan Wermuth

The barrage of data did not alter the view the Bank of England would keep interest rates at a record low of 0.5 percent on Thursday and continue pumping cash into the economy.

But sterling rose and gilts fell as the figures cast doubt on whether a further aggressive stimulus would be needed once the Bank’s initial 75 billion pound asset-buying scheme is completed at the end of this month.

The latest PMI survey by CIPS/Markit showed activity in the services sector, which accounts for three-quarters of the economy, shrank at its slowest pace since last August.

The headline activity index rose to 48.7 in April from 45.5 in March, the biggest one-month rise in a decade, leaving it only a tad below the 50-mark that would indicate growth.

Crucially, new business levels also contracted at a much slower pace and companies were their most upbeat in almost a year about the business outlook.

Mortgage lender Nationwide said consumer morale improved at its fastest pace in two years last month as people sensed the worst of recession may have passed.

And the REC/KPMG report on jobs showed the decline in permanent job placements eased to its slowest in seven months, while wages also fell at a slower pace in April.


Together, the surveys provided a glimmer of hope that the worst may be over for the UK economy, which shrank at its fastest rate in 30 years in the first three months of this year.

But a return to growth is still a long way off and the data may do little to change the fortunes of Prime Minister Gordon Brown, whose Labour party faces the prospect of defeat at an election that has to be held by the middle of next year.

Soaring unemployment and weak pay growth are continuing to dent Britons’ spending power and the housing market is still in sharp decline.

Mortgage lender Halifax reported a 1.7 percent drop in prices in April on Wednesday, meaning prices have slumped by almost a quarter since their peak in 2007.

“With the manufacturing sector still very much under the cosh, unemployment set to rise further and house prices still falling, in reality a return to sustained GDP growth may take a bit longer to materialise,” said Colin Ellis, economist at Daiwa Securities.

A parliamentary committee also questioned growth prospects, issuing a report on last month’s budget in which it described government forecasts of a return to growth of 3.5 percent by 2011 as an “optimistic assumption.”

“We question the decision to assume that the economy will begin registering positive growth as early as the fourth quarter of 2009, and that the economy will register such strong growth in 2011,” it said.

The PMI survey showed that almost a fifth of services firms cut jobs in April, while weak demand and strong competition forced companies to cut their prices.

Simon Hayes, chief UK economist at Barclays Capital, said the weak inflation outlook could still persuade the Bank to extend its 75 billion pound asset buying programme.

“Although it’s nice to see these positive indicators, the broad picture is the inflation outlook is very weak and so it’s going to have to inject more support into the economy, which means extending its quantitative easing purchases,” he said.

The central bank is unlikely to make any decision on that on Thursday, but most analysts expect to gain some insight into its thinking when it publishes updated quarterly growth and inflation forecasts next week.

Editing by Kate Kelland and Andy Bruce

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