House prices and business confidence raise hopes of recovery

Fifth successive improvement in sentiment points to recovery by 2010

The British economy may already have passed through the worst of the downturn, according to the latest economic indicators. Though output and house prices seem set to continue to fall for some months, the pace of decline appears to be easing considerably, raising expectations that stabilisation and even growth may return to the economy by the end of the year.

The Chartered Institute of Purchasing and Supply's monthly poll of business confidence in the service sector was published yesterday, and it echoes the more hopeful developments identified in the Cips surveys in manufacturing and construction. In the Cips index a reading of below 50 signifies a contraction, with 50 neutral and a number in excess of that suggesting an increase in orders and activity. In April the headline figure rose from 45.5 to 48.7, the fifth successive improvement in general sentiment. If repeated in May it would push the index over the 50 mark, suggesting, tentatively, some sort of recovery, albeit weak, by 2010.

The Cips surveys historically have proved a reliable leading indicator of future economic trends, with about a six-month lag. Services account for about 70 per cent of the economy. Economists agree that the country could see a recovery by the year end, but were downplaying hopes of a rapid "bounce".

Vicky Redwood, of Capital Economics, struck a note of caution: "We find it hard to see how the surveys will continue to improve at the rates seen over the past month or two. Activity could continue to benefit in the near-term from the powerful policy stimulus. But the factors dragging on growth – tighter credit conditions, rising unemployment, slowing pay growth and a prolonged process of deleveraging – are likely to remain in place for some time."

Roy Ayliffe, the director of Professional Practice at the Cips, added: "Jobs were slashed at an exceptional rate with around 22 per cent of service providers streamlining staff. On the back of depressed spending, intense competition and a plunging pound raising import costs, it's unlikely that the scars inflicted over the last year will fade quickly."

Reaction to the latest Halifax house price data was similarly muted. House prices are still falling, by 1.7 per cent in April according to Halifax, slightly slower than the 1.9 per in March. Property values stand down by 22.5 per cent below their August 2007 peak; the value of the average home has dropped by approaching £50,000 – to £154,716. House prices were last at this level in April 2004.

The Halifax data is more gloomy than recent figures from the Nationwide, and both indices are volatile, suggesting that "price discovery" is proving more difficult in the current very slow and less liquid market. Recently, mortgage approvals and buyer inquiries at estate agents have edged up.

Howard Archer, the UK economist at Global Insight, said: "There are increasing signs that the housing market activity may have passed its worst point, helped by the substantial fall in prices and markedly reduced mortgage rates. Nevertheless, activity remains very low by past norms. Furthermore, housing affordability ratios are still above their long-term norms."

The – relatively – good news on the domestic scene was complemented by a prediction from the World Bank that the catastrophic drop in world trade caused by the global financial crisis is "bottoming out". Bernard Hoekman, director of the World Bank's international trade division, said: "We're seeing now signs that this is bottoming out. Certainly the rate of decline has dropped... We'll see if that persists and we have reached the bottom."

The Bank of England's Monetary Policy Committee is widely expected to leave rates on hold at 0.5 per cent today, and to press on with its programme of quantitative easing. Analysts will be looking closely to next month's MPC meeting for signs that the Bank is ready to go beyond the initial £75bn committed to the scheme, which will be exhausted by then.

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