Car sales to drive UK out of recession

Manufacturing output growth is the best since January last year
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The Independent Online

A sharp rebound in the British motor industry may have ended five successive quarters of contraction and pulled Britain out of recession sooner than expected – though only to reach a state of "stagnation".

The Office for National Statistics reported yesterday that manufacturing output rose by 0.8 per cent in July, following a 0.6 per cent recovery the previous month. Output of motor vehicles led the charge, rising by 10.4 per cent in July.

The end of the "destocking" by car dealers and the impact of the scrappage subsidy were said to be the main drivers of the industrial resurgence. The figures are the best since January last year.

Economists argue that, taken with improving surveys of business sentiment in the much bigger services sector, an official end to the recession could be declared when the third-quarter GDP figures are released by the ONS next month.

The National Institute for Economic and Social Research (NIESR) added to the very cautious optimism. The institute said that the economy grew by 0.3 per cent over the three months to the end of August, the first positive quarterly result since May 2008.

NIESR said its research "reinforces our view that the recession ended in May of this year. There may well be a period of stagnation now, with output rising in some months and falling in others; the end of the recession should not be confused with a return to normal economic conditions".

Colin Ellis, economist at Daiwa Securities, added: "Together, those readings would be enough to put overall GDP growth just back into positive territory, barring another collapse in construction. So if the UK economy can just bounce along the bottom for a few months, growth will technically resume in the third quarter."

The key question facing the economy is whether the revival will be sustained. As retailers and other businesses rebuild stocks, the growth figures may flatter the real image of what is happening in the economy; but the scheduled rise in Vat, the end of the scrappage scheme and the ending of other official support for the economy, including a rise in interest rates in due course, add to the danger of a "double dip" or so-called "W-shaped" recession.

The weak momentum in the economy is illustrated in the latest data on jobs. The Recruitment and Employment Confederation (REC) and KPMG Report on Jobs published yesterday signalled a return to growth of both permanent and temporary staff appointments during August – but "only marginally".

Bernard Brown, partner and head of business services at KPMG, said: "This is the first time we have seen really positive news for the UK jobs market in 17 months. However, it is too early to speculate whether this signals the end of the recession.

"One important factor to watch over the coming months will be how the public sector is coping with the financial and economic crisis."

A parallel labour market survey by the online Monster employment agency confirmed the trend. Monster said that its employment index dipped slightly as online job availability remained largely unchanged for a fifth consecutive month.

Consumers too are showing only modest signs of improved sentiment. The Nationwide Consumer Confidence Index has been improving slowly since March, and has recorded a further marginal rise for August. Households are feeling better about their current financial situation and future prospects.

Martin Gahbauer, Nationwide's chief economist, said: "It is likely that there will be a protracted recovery and we may see some volatility as factors such as the rise in fuel duty affect sentiment.

"Although positive news about the housing market may have helped boost confidence, consumers' views about spending remain relatively cautious, possibly because the level of heavy discounting earlier in the year has now subsided."