Slowing decline adds to mood of optimism surrounding UK economy

The suggestion from new Bank of England policymaker David Miles that the UK could be through the worst of the recession adds to the mood of guarded optimism surrounding the economy in recent weeks.

A slew of data and business polls have signalled that the pace of decline is slowing across most major areas of the British economy, while even the poorly pound has been showing signs that it is getting its strength back.

Sterling last week hit its highest level against the US dollar since January and was also making advances on the euro.

Better-than-expected results from major US banks such as Goldman Sachs and JP Morgan, together with an encouraging credit conditions report from the Bank of England, has indicated the credit crunch may be releasing its grip.

This has been crucial in helping the pound by allaying worries over the impact of the bank bail-outs on public finances, but it also represents the first step in the road to wider economic recovery, according to experts.

It has been widely acknowledged that the breakdown in financial markets posed the biggest risk to the economy and that lending must be restored to households and businesses.

If this is on the mend, so too the economy has a chance, said Peter Spencer, chief economic adviser at the influential Ernst & Young ITEM Club.

"Until now, with the financial system on the edge of a precipice, no-one had any idea of what sort of a recession it would be or even if we were facing a depression," he said.

"At least we can now get the recession under our belts and get a feel for the path it will take and begin to speculate on the shape of the recovery. And if you look at the monthly data, it doesn't matter which country or which business survey, the falls in output are getting smaller," he added.

In the UK, data from the services and manufacturing sectors have shown a halt in activity contraction, while in the housing market, lending has begun to increase and surveyors this week even reported an increase in home sales for the first time in more than a year.

David Page, Investec economist, said there were signs of "significant" improvement in the UK economy and predicted that output will stop contracting as soon as the second half of the year. We're more optimistic than the consensus, but things are moving in the right direction," he said.

However, for the more than two million left without a job in the UK, it will be sometime yet before any green shoots of recovery feel real.

"We have already seen a huge amount of pain and there's more pain lying ahead, particularly for consumers and people who may have lost their jobs, but at least we can begin to see the scale of the recession and look forward to a point when it will come to an end," said Spencer.

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