LONDON (AFX) - UK economic figures to be released this week are expected to confirm the recovery is under way, giving the Bank of England's Monetary Policy Committee the green light to raise rates in July, according to economists.
Philip Shaw, UK economist at Investec, said Tuesday's manufacturing release will be a highlight and is likely to fuel expectations of an imminent rate hike following the MPC's decision last Wednesday to hold rates at 4.00 pct.
"Pick of the crop will be the manufacturing figures, which we believe will show a rebound of 1 pct in April which could give the MPC the green light to raise rates in July," Shaw said.
This result would signal the end of the manufacturing sector's recession, Shaw said, adding that the rebound in global activity should also boost the sector's prospects, along with the current depreciation of sterling against the euro to 2-1/2 year lows.
A strong result would be in line with recent surveys from the Confederation of British Industry and PMI data.
"The CBI and PMI surveys suggest that the industrial recovery was firmly in place by the second quarter," John Butler, UK economist at HSBC, said.
The lagging manufacturing sector has proved a concern for the BoE, which has been reticent to hike rates whilst the sector is underperforming.
An upturn in manufacturing could remove the final obstacle for the MPC and clear the way for a rate hike to rein in consumer demand and the house price boom as soon as next month.
Producer price figures are likely to show that inflation pressures are virtually non-existent, according to Butler at HSBC, who forecasts core PPI to increase by 0.2 pct month-on-month, remaining unchanged versus a year ago.
Last month's 0.9 pct rise in input prices is likely to be partially reversed in May due to lower commodity prices, Shaw said.
Manufacturing remains fiercely competitive and this should keep the lid on price increases, he added. Trade figures, due out Tuesday, are likely to show a small narrowing in the trade deficit in April, on an improvement in trade with non-EU countries, Butler said.
Shaw at Investec said it is difficult to forecast which way the current account will go now since an improving outlook for exports is being offset by the persistence of robust domestic demand growth.
At the end of the week, Friday's labour market report will be scrutinised to see whether the service sector has began to recruit again, as signalled by the latest British Chambers of Commerce and NTC surveys. Although there could be some signs of the labour market picking up, economists warn it is too early to expect a full-on recovery.
"We believe it is too early to start expecting a new downward trend in unemployment as companies are attempting to rebuild their profitability," Butler said.
Given that companies have been hoarding labour in anticipation of an upturn in demand, Shaw said any fall in unemployment is likely to be gradual as firms use their existing workforces to meet additional orders.
The bonus factor is also likely to diminish, as April is outside the main bonus season, Shaw said. Bonuses have been depressing the headline earnings figure, as they have been coming in well below last year's levels, due to the downturn in the financial and consultancy sectors.
M&A activity has also been almost at a standstill in the UK, further depressing bonus payments.