Fastest UK production since 1987 signals recession end

LONDON Fri Sep 7, 2012 7:47am EDT

A gull flies near construction cranes with the Shard building seen behind in London August 24, 2012. REUTERS/Toby Melville

A gull flies near construction cranes with the Shard building seen behind in London August 24, 2012.

Credit: Reuters/Toby Melville

LONDON (Reuters) - British industrial output grew at its fastest pace in 25 years in July, making up all the ground lost due to an extra public holiday in June and raising the chances that the economy is crawling out of recession.

Separate data from Office for National Statistics showed cost pressures for firms were rising again, a potential concern for the Bank of England, which is hoping that falling inflation will ease pressure on cash-strapped British consumers.

While the price and production data may raise doubts over the need for further monetary stimulus from the central bank, the economy's fragility and vulnerability to Europe's debt crisis mean most economists still expect another dose of easing.

"On balance, we still think we'll get more quantitative easing in November," said Investec economist Victoria Clarke.

"But if these figures continue through the rest of the quarter, coupled with a broader rebound, that could start to look a bit more debatable and it could make that November meeting certainly more lively."

Britain's economy has still not fully recovered from a 2008-2009 slump. It slipped back into recession late last year as the euro zone debt crisis hurt export demand and business confidence, compounding the effects of the government's tough austerity plans aimed at erasing a huge budget deficit.

The economy is likely to show some growth in the third quarter thanks to the rebound in production and sales of tickets for the London Olympics and Paralympics, which may add 0.2 percentage points to growth in the third quarter.

Manufacturing output jumped 3.2 percent in the month of July after a drop of 2.9 percent in June, when an extra holiday to mark Queen Elizabeth's 60 years on the throne hit output, the Office for National Statistics said.

This was the strongest rise since July 2002 and above even the most optimistic economists' forecast.

The wider reading of industrial output, which includes energy production and mining, leapt 2.9 percent in July, the biggest rise since February 1987.

Sterling and gilts were little moved by the data as the European Central Bank's plan outlined on Thursday to buy Italian and Spanish government debt has eroded the appeal of safe haven assets such as British government bonds.

OLYMPIC BOOST

The ONS estimated ticket sales from the Olympics and Paralympics would add about 580 million pounds in revenue, which should lift growth in the third quarter and help drag the economy out of recession after three quarters of falling output.

"My working assumption was a gain of about three quarters of a percent (in third-quarter GDP) ... maybe I wasn't optimistic enough," said Alan Clarke, economist at Scotiabank.

Business surveys have indicated a stabilization of demand for manufacturing products in August and service firms reported improved business.

Most economists predict now that GDP will be lower this year than in 2011, and many see only a sluggish recovery next year, which keeps pressure on the government and BoE to boost growth.

On Thursday, the Organisation for Economic Co-operation and Development slashed its forecast for British growth this year to -0.7 percent from 0.5 percent, and warned the outlook for all major economies is darkening.

At its policy meeting on Thursday, the Bank of England stuck with its current program of buying 50 billion pounds' worth of government bonds with newly created money until November.

A survey showed that Britons took a more benign view of the inflation outlook, though their satisfaction with the central bank hit a record low.

The government has launched a number of measures to get credit flowing and boost infrastructure and house building, but finance minister George Osborne has so far ruled out any easing of his plan to tame the deficit.

A rise in construction orders in the second quarter by 0.2 percent, also published on Friday, indicated that the construction sector, the main drag on the economy in the first half of 2012, may be stabilizing.

Annual factory gate inflation ticked up to 2.2 percent in August, and rising oil costs drove firms' input costs up 2.0 percent on the month, taking the annual input price inflation to 1.4 percent, both above forecasts.

The government and the central bank have been hoping that lower inflation will ease the pressure on households' budget and allow consumers to spend more and support the faltering economy.

(Additional reporting by David Milliken, Alessandra Prentice and Peter Griffiths; Editing by Catherine Evans)

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