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The economy showed further signs of life today as manufacturers put the worst of the recession behind them and the City bet interest rates will remain at record lows for another year.
The Purchasing Managers Index gauge of activity at Britain's factories rose from 45.4 in May to 47 in June, still below the 50 cut-off between contraction and expansion but the highest level for 13 months.
Sterling recovered early losses as investors hoped for a spring and summer bounce following yesterday's news that the economy contracted by a whopping 2.4% in the first quarter, the biggest decline for more than 50 years.
The pound was broadly unchanged at $1.6454. The news came as City economists forecast the Bank of England to leave interest rates unchanged at 0.5% for another year to help drag the country out of recession.
“The UK economy is still in a very deep recession which will lead the Bank to keep rates low for some time,” said Azad Zangana at Schroders Investment.
The Reuters poll of economists also predicted the Bank will pump more money into the economy by extending its quantitative easing programme from £125 billion to £150 billion, possibly as early as next week.
“Events over the past couple of months justify an expansion of quantitative easing by a further £25 billion to £150 billion,” said Philip Shaw of Investec. The PMI manufacturing survey also showed the first rise in factory output since March 2008 although readings on unemployment, new orders and exports remained subdued.
Official figures showed output by firms in the services sector, which includes hotels and restaurants and makes up three quarters of the economy, fell 1.2% in the three months to April compared with a 1.6% slump in the three months to March.
Jonathan Loynes of Capital Economics said: “The latest news on the manufacturing and services sectors confirmed that the economy's rate of contraction eased markedly in the second quarter.”
