Britain's bouncing back to wealth

BRITAIN’S economy bounced back spectacularly yesterday with shares soaring and the pound on a 10-month high against the dollar.

ON THE WAY UP The pound has rebounded 25 per cent from its record low in January ON THE WAY UP: The pound has rebounded 25 per cent from its record low in January

And as banks reported huge profits even the beleaguered manufacturing industry was rallying.

There was also good news in the housing market as a new report suggested prices in the UK will soar by as much as 20 per cent by 2014.

On the same day that two banks, Barclays and HSBC, announced joint profits of nearly £6billion, the jump in the value of sterling sparked renewed optimism in the City.

The FTSE surged through the 4,700 barrier before closing at 4,682 – a massive turnaround since March when it was just above 3,500 points.

At the same time Barclays revealed it was lending more money than expected to businesses and individuals this year, having advanced £17billion in the first six months against a target of £11billion for all 2009.

The struggling manufacturing sector also recorded the first rise in activity since March last year.

John Varley Chief executive of Barclays Bank which reported profits of nearly 3billion John Varley, Chief executive of Barclays Bank, which reported profits of nearly £3billion

City analysts particularly welcomed the recovery of sterling, saying it would lead to a further rise in confidence and performance.

The pound rose to 1.69 US dollars, its highest level since mid-October, and also hit a one-month high against the euro at 1.17.

And while it is still a long way below the $2 levels of July last year, the pound has rebounded 25 per cent from the 23-year low of $1.35 that it hit this January.

Mark O’Sullivan, director of dealing at specialist foreign exchange provider Currencies Direct, said: “We have now shifted into a higher trading range against the dollar after finally breaking above 1.66.”

The pound is rallying as confidence returns to the UK banking sector, and more good news is expected from Lloyds and RBS in the week

Mark O'Sullivan, of Currencies Direct

Part of the reason, he said, was yesterday’s unexpectedly strong results from the banking sector.

“The pound is rallying as confidence returns to the UK banking sector, and more good news is expected from Lloyds and RBS in the week,” he said.

“The pound was also boosted by improved second-quarter data from the United States. This helped comfort the markets, which weakened the dollar, and continued the equities’ bull-run.”

He added: “Sterling is a currency that reacts to hope and fear, and we are certainly in the land of hope and glory today.”

The US currency has suffered as signs of a global economic recovery have encouraged investors to move their money out of dollars and into riskier assets.

The dollar is trading near its lowest levels this year when measured against a group of major currencies.

As the pound surged, the FTSE rocketed and the manufacturing sector showed renewed life, with a survey showing the first rise in activity since March last year.

David Jones, chief market strategist of IG Index, said: “The strength in UK stocks continued again today, with the FTSE back to levels not seen since early October.

“The banking sector has been today’s focus and investors have taken the latest profit announcements as further evidence that economies have turned the corner.

“The market does have a different feeling about it at the moment. For over a year now rallies seemed to be plagued by the nagging doubt that the strength would not last and traders would be only too quick to hit the sell button on the first sign of weakness.

“This time around, it seems to be the fear of missing out on even more strength that is keeping the market buoyant and so any weakness is short-lived.”

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The turnaround in the fortunes of the manufacturing industry was particularly welcomed yesterday.

The Chartered Institute of Purchasing & Supply’s headline measure of the sector posted 50.8 in July, above the neutral 50 mark and well ahead of City expectations.

The report showed that production rose for the second successive month and to the greatest extent since December 2007, helped by a recovery in new orders.

CIPS chief executive David Noble said: “The manufacturing sector has clearly pulled out of the nosedive it was in earlier this year and is no longer plummeting.”

He said customers slashed inventories so severely in the downturn that they were now in need of new stock to meet improved sales.

But he warned it was still early days and that smaller firms continued to bear the brunt of the recession.

Yesterday’s research also found that manufacturing employment declined for the 15th month running in July, although the rate of decline was the slowest since June last year.

Howard Archer, an economist at IHS Global Insight, said the competitive pound was helping the sector by making UK manufacturers stronger in their domestic markets as well as by helping exporters.

However, he sounded a note of caution, particularly as the CBI industrial trends survey for July showed a marked relapse in orders.

“Manufacturers still face serious obstacles and the suspicion remains that sustainable growth in the sector could yet prove elusive for some time to come,” he said.

Hetal Mehta, Ernst & Young’s senior economic adviser, said there was an increasing chance that the economy would pull out of technical recession by the end of the year.

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