Surge in home loans, store sales lift hope of recovery

Banks and building societies lent £16 billion in home loans last month - up 26% from June but down 36% on July last year.

Retail sales were 3.3% higher than in July last year, driven by increasing demand among shoppers for clothes and shoes.

The recovery in the housing market also drove sales of furniture and electrical items.

James Knightley, economist at ING Bank, said: "This give us greater confidence that gross domestic product will rise in the third quarter, meaning the UK exits recession."

The economy shrank by 0.8% in the second quarter and 2.4% in the first quarter following three quarters of contraction last year. However, economists warned the recovery could be held back as taxes rise and spending is cut to reduce ballooning levels of Government debt.

Shocking figures today showed the Government borrowed a record £8 billion last month pushing national debt above £800 billion or 56.8% of GDP. Vicky Redwood, of Capital Economics, said: "Retail sales are holding up well, but the dire public finance figures underline the need for severe fiscal consolidation. We continue to think the prospect of sharp tax rises - on top of rising unemployment and weakening pay growth - will eventually prompt this High Street resilience to fade."

The pound fluctuated as the City digested the mixed figures, first rising on the good news from the housing market and the High Street, but then falling as the dire state of the public finances was laid bare. It settled down 0.38 cent at $1.649.

The £16 billion of home loans advanced in July was the most for nine months, according to the Council of Mortgage Lenders, as buyers took advantage of the collapse in house prices and low interest rates.

"This is further evidence of a modest improvement in the market over the summer after an exceptionally weak winter," said CML economist Paul Samter. "However, activity is still subdued by historic comparison - this is the lowest July lending since 2001.

"The bounce-back in activity from the extreme weakness around the turn of the year, coinciding with a seasonal bounce, is limited in how far it can go against the current backdrop."

Nick Hopkinson, director of Property Portfolio Rescue, said: "The fact mortgage lending was up in July is no cause for celebration. Lending is still 50% down on pre-credit crunch volumes."