January 4, 2010 / 1:13 PM / 10 years ago

Upbeat data boost UK recovery hopes for 2010

LONDON (Reuters) - A sharp rise in manufacturing activity, mortgage approvals and a key measure of money supply boosted hopes on Monday that the economy is gaining traction after an 18-month recession.

An employee works on the production line at the Nissan car factory in Washington, northern England March 20, 2009 file photo. REUTERS/Nigel Roddis

The data backs government and Bank of England forecasts that the economy, which unlike the euro zone and United States remained stuck in recession in the third quarter, returned to growth towards the end of 2009.

The figures also strengthened expectations that the Bank will not extend its asset purchase programme designed to boost money supply and promote lending once the 200 billion pound target is reached in early February.

“It’s been a strong start to the year for UK domestic data,” said Philip Shaw, economist at Investec. “While the Monetary Policy Committee has left the door ajar for more quantitative easing, we think it is more likely that 200 billion will be the final total.”

British manufacturing activity expanded at its fastest pace in more than two years in December, according to the CIPS/Markit purchasing managers’ index which rose to 54.1 last month, after a surprise fall to 51.8 in November.

Particularly encouraging was a 4 point rise in the new orders index to 57.4, its highest level since July 2007. The increase was driven by domestic demand, as growth of new export orders was only slight.

Sterling rallied to a session high versus the dollar after the data.

The economy represents the key battleground for votes in the pre-election campaigns of the main political parties, which kicked off in the last few days for in preparation for a national vote due by June 2010.

The Conservatives have profited from the weak state of the economy and is tipped to win power for the first time since 1997, while the Labour is hoping that a quick rebound will improve its chances at the polls.

HOUSING RECOVERY TO CONTINUE

The recovery in Britain’s housing market — where prices rose almost 6 percent in 2009 according to the Nationwide Building Society — continued to maintain momentum.

Approvals for mortgages for house purchase, a lead indicator of demand, rose by almost 3,000 in November to 60,518. This was the highest level since March 2008, and more than double the record low hit in November 2008.

“The figures have surprised positively,” said Amit Kara, economist at UBS. “They are consistent with our more constructive view on UK housing as well as for overall economic growth this year.”

The recovery in house prices and a brightening economic outlook have made banks less cautious about lending.

Net mortgage lending rose by a surprisingly large 1.459 billion pounds in November, its highest since February. And while consumers repaid unsecured debt for a fifth consecutive month, the 376 million pound repayment was well below the 591 million pounds repaid in October.

There was also a marked rise in the Bank’s preferred money supply measure, which attempts to strip out distortions from the financial sector and measure flows through the real economy.

The gauge, M4 excluding intermediate other financial corporations, rose by 0.9 percent in November, its fastest monthly pace since April. The three-month annualised rate picked up to -2.2 percent from October’s -5.2 percent.

M4 lending on the same measure rose by 1.1 percent, its biggest monthly rise since July 2007.

“The latest money supply and bank lending data show some welcome improvement,” said Howard Archer at Global Insight. “This lifts hope that quantitative easing and other policy measures are now increasingly impacting.”

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