Economic recovery is on the way at last, says Bank of England

A lifeline for the Chancellor – but expect the going to be slow, warns rate-setter

There is now "light at the end of the tunnel" for the UK economy, according to the Bank of England.

Spencer Dale, one of the Bank of England's key rate-setters, made his prediction of a return to growth in the later part of the year, backing Governor Mervyn King's comments in a rare TV interview that there were definitely "signs of a slow recovery".

The Bank's comments will give embattled Chancellor George Osborne – who yesterday faced a worse-than-expected public borrowing figure that set an August record of £14.4bn – a welcome boost, coming ahead of a week of what is predicted to be better news for the UK economy.

Mr Dale said on a visit to eastern England that there were encouraging signs that business is able to borrow again from the banks following the BoE's £80bn Funding for Lending scheme launched in August.

"There is some light at the end of the tunnel. It is an uncertain light... but we are hopeful," he added. The positive comments from the Bank's chiefs follows on from Sir Philip Green, the owner of Arcadia, the BHS-to-Topshop retail giant, calling the bottom of the economic slump in retail. The billionaire doyen of the high street declared that the market has "flattened, it's bottomed, now we've got to rebuild".

The bosses of M&S and Sainsbury's have also had positive things to say about the chances of the UK coming out of recession soon. The IPSOS Mori Economic Optimism Index has risen for the second month in a row, from minus 27 to minus 9, the highest economic optimism number since July 2010. Most analysts expect the ONS to revise upwards its estimate of second-quarter GDP next week because of better figures from the construction industry. The ONS's first estimate of GDP, showing a contraction of 0.7 per cent, caused dismay in Whitehall and prompted political opponents to call for an urgent change of economic course. Howard Archer, chief UK economist at IHS Global Insight, said: "A healthy rebound in industrial production and much-reduced trade deficit in July as well as a pick-up in services activity in August have lifted growth hopes."

IHS now predicts strong growth of 0.7 per cent for July to September.

Economic numbers from the eurozone may not display any "green shoots" but the mood music is better than it has been for months. The European Central Bank has said it will stand as a "backstop" to eurozone members that request it to buy its government bonds.

Better eurozone news may be one reason why former PM John Major, recently resurrected the "green shoots" term – a phrase first used catastrophically by his Chancellor Norman Lamont – to describe the UK economy. But there are more than a few economic clouds ready to rain on Mr Major's parade. Yesterday's public borrowing figures were one.

Deutsche's George Buckley said: "Spending and receipt figures in today's report suggests a full-year miss [of the government's borrowing target] of around £10bn to £15bn."

At the heart of this lies the sobering fact for the Chancellor that whereas tax receipts are growing at 0.4 per cent of GDP, government spending is rising at 3.9 per cent. The black hole at the centre of government finances could force more cuts in the next Budget, potentially stamping on any green shoots of economic recovery.

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