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UK economy showing few signs of recovery: Bank of England's King
LONDON (Reuters) - Britain's economy shows few signs of recovery, Bank of England Governor Mervyn King said, as a boost to manufacturing and retail data from the Queen's Diamond Jubilee celebrations failed to dispel fears of another quarter of economic contraction.
Britain fell into its second recession in four years around the turn of the year, and the central bank announced last week another 50 billion pound cash injection to boost demand after business surveys pointed to more weakness ahead.
The government is trying to support the economy with schemes aimed at getting credit to companies flowing, but pressure is mounting for money to be spent directly on infrastructure projects despite its pledge to erase the huge budget deficit.
Manufacturers got a lift in May when a holiday was postponed to June to mark Queen Elizabeth's 60 years on the throne, a move which then boosted retail sales in June, but the country still looks set for a third quarter of recession.
"The economy has basically been flat for two years and doesn't show a great deal of signs of impending recovery," King said in a BBC radio interview conducted late on Monday.
The "black cloud" of uncertainty about the future of the euro zone was keeping businesses from investing, King said.
He also repeated his view that investment banking and retail banking should not take place under the same roof, and that Britain suffered from a harmful lack of competition between its major banks.
Think-tank NIESR said on Tuesday that Britain's economy shrank 0.2 percent on the quarter, although it added that the economy's underlying performance was probably better because the extra holiday had distorted the numbers.
British manufacturing output rose 1.2 percent in May, smashing forecasts for no change, as an additional working day due to the postponed public holiday allowed for more work, the Office for National Statistics said on Tuesday.
However, a downward revision to previous months and the extra holiday added to June leaves little chance that output rose on the quarter.
"From the performance of the industrial sector in recent quarters, it appears that the hoped for manufacturing-driven recovery is not likely to materialize in the near term," said Blerina Uruci at Barclays.
A wider reading of industrial output, which includes energy production and mining, was 1.0 percent higher in May after a 0.4 percent drop in April. Output was down 0.3 percent in the three months to May compared to the previous three months.
Economists in a Reuters poll taken last month predicted 0.1 percent growth in the second quarter, and tepid growth over the coming year with only a modest bounce in the current quarter from London's hosting of the Olympic Games.
While the extra holidays will drag on production in June they pushed retail sales to rise at their fastest annual pace since December, the British Retail Consortium said.
Sales rose 1.4 percent in value terms, but that was far weaker than the 2.0 percent forecast by economists in a Reuters poll as fears about the state of the economy and a wet end to the month led shoppers to keep their hands in their pockets.
Bellwether British retailer Marks & Spencer posted its worst underlying quarterly sales performance for three and a half years on Tuesday after womenswear trade was ravaged by the wettest April and June since records began.
Sterling hit a 3-1/2 year high against the euro on Tuesday, as the common currency wilts in the face of the ongoing debt crisis, but Britain's trade deficit narrowed in May on what may be a temporary rise in exports, a separate release showed.
"I am worried about the outlook for exports because sterling has risen over the past year and that's going to be a challenge and because of the state of euro area," King said in the BBC interview.
The goods trade deficit shrank to 8.363 billion pounds in May from 9.709 billion pounds in April, the ONS said. Economists had forecast a deficit of 9.0 billion pounds.
"Much of the narrowing in the goods trade deficit came from increased exports to non-EU countries," Rob Harbron from consultancy CEBR said.
"While today's releases provides some good news for UK exporters, risks remain to the outlook," he warned. "Global growth is slowing, putting downward pressure on export prospects, while underlying fragility in the production industries is likely to remain."
The growth stifling crisis in Britain's main trading partner is so far showing few signs of abating, threatening to implode the common currency, and has wreaked havoc across the continent and beyond.
(Additional reporting by David Milliken, Sophie Kirby and Venetia Rainey; Editing by Catherine Evans)
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