June 4, 2013 / 8:37 AM / 7 years ago

UK data paints brighter economic picture but worries persist

LONDON (Reuters) - Britain’s construction sector returned to growth and retail sales rebounded in May, data on Tuesday showed, offering fresh evidence that the economy is clawing its way to recovery.

A general view shows the Pudding Mill Lane Crossrail construction site, with the Olympic Park in the background, in east London May 16, 2013. REUTERS/Lefteris Pitarakis/pool

After stronger-than-expected manufacturing numbers on Monday, the reports reinforced expectations that the Bank of England will refrain from more bond-buying.

The central bank holds its June policy meeting on Wednesday and Thursday. A Reuters poll last week showed economists believe the chance of more gilts purchases with newly minted money this year has fallen to below 50 percent.

The positive run of data will also cheer Chancellor George Osborne, who has come under pressure to loosen his austerity programme and do more to boost growth.

But economists warned Britain is far from out of the woods.

“Certainly it adds to the general positivity which suggests that we will continue to see growth through the second quarter,” said Victoria Clarke at Investec.

“It’s far from certain, though, that will be sustained through the remainder of the year, particularly given the euro area remains weak, and there’s still big question marks about the global backdrop.”

The Markit/CIPS construction Purchasing Managers Index, published on Tuesday, showed an increase to 50.8 in May, above the 50 mark that divides contraction and growth. Up from 49.4 in April, it was the first growth in six months and better than a Reuters poll forecast of 49.6.

The British Retail Consortium said retail sales were up 3.4 percent in May compared with the same month last year, boosted by online shopping.

A PMI survey on Monday had already shown manufacturing grew at its fastest pace in over a year in May, while a similar survey of Britain’s key services sector is due on Wednesday.

Recent signs the economy is strengthening have been welcomed by retiring Bank of England Governor Mervyn King.

“The scale of the stimulus provided by the Bank means that there are now good reasons to suppose that a gentle recovery is under way,” King, who leaves this month, said in the foreword to the central bank’s annual report on Tuesday.

The chances are probably falling of new Governor Mark Carney seeking to ramp up the Bank of England’s bond buying immediately when he takes over from King on July 1.

“It makes it more a difficult sell,” said Clarke. “But he’s talked about ‘escape velocity’ and I doubt that the data that we’re seeing at the moment is consistent with the view that we’re close to that.”

FRAGILE STATE

The construction growth was driven by a rise in house-building, which hit its fastest pace in 26 months.

With the housing market held back by tight mortgage lending and tough planning rules for new building, the Conservative-led government announced plans in March to make it easier for home-buyers to get a mortgage and to spur construction.

Growth in the overall construction sector remained marginal. Public sector projects were thin on the ground and weak business confidence showed up in a low level of commercial building.

“The construction sector is clearly still in a fragile state with May’s growth heavily dependent on residential building,” said Howard Archer, economist at IHS Global Insight, adding a sustained improvement was far from certain.

Britain avoided a return to recession in the first quarter of 2013 but growth remains weak with consumers squeezed by below-inflation wage rises and austerity measures and banks wary about lending as they run down pre-credit crunch loans.

Last month, the International Monetary Fund warned that Britain needed to change tack and spend more on roads, housing and schools to kickstart the economy.

“A ‘lost decade’ for this country is not a given,” said Martin Beck at Capital Economics in a report on Tuesday. “But Japan’s experience suggests that insufficiently radical and aggressive efforts to lift the spirits of firms and households could risk saying ‘sayonara’ to a decent economic recovery.”

Additional reporting by William Schomberg; Editing by Catherine Evans

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