Upbeat start to the year sparks hopes of recovery

Manufacturing confidence reaches two-year high / Mortgage approvals continue to rise, says BoE
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The Independent Online

The UK economy ended 2009 on a high note and may be close to exiting recession, data published yesterday suggests, with improving figures on mortgage approvals, manufacturing confidence and money supply.

Early estimates of retail activity in the first few days of the year also support the idea that momentum is being maintained in 2010, despite the reversion of VAT from 15 per cent to 17.5 per cent on New Year's Day.

The data strengthens hopes that the official growth figures for the third quarter of 2009, to be published by the Office for National Statistics on 26 January, will show that the UK has emerged from recession, the last major advanced economy to do so.

The Chartered Institute for Purchasing and Supply said yesterday that confidence across the manufacturing sector improved in December, with their headline index up from 52 to 54.1 – any reading above 50 indicates expansion. The reading exceeded economists' expectations and is the best in two years.

With analysts expecting little movement from the Bank of England's Monetary Policy Committee this week, there were tentative signs that the Bank's £200bn programme of quantitative easing (QE) is boosting money supply and the growth of credit in the real economy. The Bank said there was a £1.9bn extension of loans to companies in November, the strongest showing since June 2008.

On the Bank's preferred measure of the growth in money supply, which excludes distortions generated in the financial services sector, there was a rise of 0.9 per cent in the November – broadly suggesting success for the Bank's policy.

However, some economists expressed doubt. Colin Ellis, of Daiwa Europe, said: "Compared with the end of March 2009, when the MPC had just started QE, on the Bank's preferred measure the stock of M4 was just £17bn higher in November, an increase of 1.1 per cent, despite the Bank having pumped over £180bn of new money into the economy."

Mortgage approvals are running at more than twice last year's levels, according to the Bank, but again this bounce-back may overstate matters. Last November marked the absolute nadir of new home loans, and lending, at a 21-month high of 60,158 approvals, is still about a third off pre-credit crunch levels. Official sources have stressed in recent weeks that the financial sector is far from being able to stand on its own feet.

More worryingly perhaps, the figures again confirmed that Britons are making strenuous efforts to rid themselves of the debts they accumulated during the boom. Net consumer credit fell by a further £376m in November, the fifth successive monthly net repayment. Consumers paid back a total of almost £2bn between July and November.

Howard Archer, UK economist at Global Insight, said: "This is clearly the consequence of many consumers' desire to reduce their debt, low demand for credit and a lack of availability of unsecured credit. Meanwhile, still tight credit conditions continue to make it generally difficult for people to borrow, especially unsecured loans."

Even though such a strengthening in household balance sheets may be prudent for individual families, the overall effect on the economy will be to depress spending and leave growth lower than it might otherwise have been – the "paradox of thrift". It is one reason why the growth in money supply has not been even stronger, and why the UK economy has been slow to return to growth.

Even so, retailers will be relieved that there was a 9 per cent rise in the number of shoppers on New Year's Day compared to 2009, and a rise of 5 per cent in retail footfall over the next two days compared with last year, according to analyst Experian.