UK recovery signs mount as services expand

UK services expanded the most in 1 1/2 years, manufacturing unexpectedly rose and home prices jumped as evidence mounts that the worst recession in a generation is easing.

An index of services rose to 53.2 in July from 51.6 in June, Markit said today in London. Factory output climbed 0.4 per cent in June, the UK’s statistics office said. Lloyds Banking Group Plc’s Halifax division said home values jumped almost twice as much as economists forecast last month.

The pound climbed to the highest since October after today’s reports, which came a day before the Bank of England’s decision on whether to expand its bond-purchase plan.

Companies are also saying the outlook is improving. Lloyds said today it expects provisions for bad loans to decline “significantly” and Taylor Wimpey Plc, the UK’s largest homebuilder by sales, said its domestic market has stabilised.

“These data all suggest that the UK will see positive growth in the third quarter,” said James Knightley, an economist at ING Financial Markets in London. “The key question for the BOE is whether these improvements are sustainable or are they just a correction following the collapse in confidence and activity in the wake of Lehman’s demise.”

The pound rose as high as $1.7005 after the services report from $1.6939 yesterday. The July figure was based on a survey of about 700 service companies from law firms to insurers and compared with the median forecast of 51.8 in a Bloomberg News survey of 27 economists.

HBOS said home values climbed 1.1 per cent to an average of £159,623 ($269,850) in July and Nationwide Building Society’s index of consumer sentiment rose to 60, the highest since May 2008. Economists had expected manufacturing to decline 0.1 per cent, a separate survey showed.

Glasgow, Scotland-based Weir Group Plc, the world’s biggest maker of pumps for the mining industry, said yesterday full-year earnings will be at the top end of its own estimates.

“The economy has turned a corner,” said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd and a former Treasury official in London. “The question is: What is the strength and durability going to be? The economy has only just started to begin to grow.”

Mounting signs of a recovery may sway the Bank of England to pause its money-printing program, which was started in March to pump more cash into the slumping economy. So far it’s bought almost £125 billion in securities and eight of 12 primary dealers surveyed by Bloomberg expect the central bank to stop the programme.

“The Bank of England may have done enough,” said Jamie Searle, a fixed-income strategist in London at Citigroup Inc. “They will probably announce a pause and reassure the market they can step in and resume the program quickly if need be. Our view is they won’t need to because the economy is beginning to recover.”

An economic rebound may help bolster the fortunes of Prime Minister Gordon Brown, who must face a general election by June next year. The Conservative opposition has a 14 percentage-point lead over Brown’s ruling Labour party, according to a YouGov Plc opinion poll finished on July 30.

For now, the recession is still pushing up unemployment, which reached the highest since 1995 in the quarter through May. The UK economy contracted 0.8 per cent in the second quarter after shrinking 2.4 per cent in the previous three months.

The gross domestic product will shrink 4 per cent this year before expanding by about 1.8 per cent in 2010, Lloyds Chief Executive Officer Eric Daniels said today. The bank expects a “gradual return” to growth in the next 18 months, adding that any rebound will be “modest.”

“Unemployment is going to continue to rise,” said Daiwa’s Lewis. The economy “dropped an awful long way.”

Thrissur-based Dhanalakshmi Bank has cloaked a net profit of Rs 6.05 crore for the quarter-ended June 30, as against Rs 3.06 crore during the corresponding period last year. Profit before tax surged 210 per cent to Rs 9.63 crore compared with Rs 3.10 crore a year ago.

Total income of the bank increased from Rs 59.23 crore to Rs 83.12 crore, logging a growth of 40 per cent. Non-interest income went up 20.47 per cent to Rs 6.06 crore during the quarter.