UK economy basks in manufacturing growth, IMF upgrade

By William Schomberg and Ana Nicolaci da Costa LONDON (Reuters) - Britain got a double boost on Tuesday as its recovery from recession gathered momentum and the International Monetary Fund raised the country's growth forecasts more than for any other major economy. Factories expanded production far more quickly than expected in February, UK statistics office data showed. Separate surveys showed a strong first quarter for companies and a long-awaited pick-up in wages. The signs that Britain is finally starting to put the financial crisis behind it are well timed for Chancellor George Osborne. He visits the IMF this week, a year after Fund officials urged him in vain to tone down his austerity programme to get growth going again. For the second time in six months, the Fund sharply raised its forecasts for British growth, which it now sees hitting 2.9 percent in 2014 before easing to 2.5 percent next year. That was up from previous forecasts of 2.4 and 2.2 percent. "I think it's fair to say that our forecast was too pessimistic," IMF chief economist Olivier Blanchard told reporters at a Washington news conference. "Part of our job is to ... warn when we see risks. Now fortunately, most risks don't materialise. And this was again a case in which it didn't." Deputy Chancellor Danny Alexander said the new IMF growth forecasts vindicated the government's approach, and that it needed to press on with more spending cuts. For all its gathering pace since early 2013, Britain's economy is only expected to get back to its pre-crisis size in the second quarter of this year, significantly lagging other economies such as the United States and Germany. With the recovery still in its early days, Bank of England policymakers, who meet this week, are in no rush to raise interest rates from their record low of 0.5 percent, especially with inflation subdued. The Bank has signalled the second quarter of next year as the most likely time for a rate hike. In its assessment of the British economy on Tuesday, the IMF warned of risks from "surging" house prices and said its big banking sector could take a hit if growth in emerging economies slowed sharply. FACTORIES GEAR UP The pound jumped on Tuesday when statistics showed manufacturing output expanded by 1.0 percent in February from January - its biggest increase since September. The annual growth rate of 3.8 percent was the highest in three years. Economists in a Reuters poll had expected a month-on-month rise of 0.3 percent and a 3.1 percent increase for the year. Overall industrial output climbed 0.9 percent on the month, recovering from a weak January when bad weather hampered North Sea oil and gas production. Osborne last month announced measures to help manufacturers, part of a long-standing attempt to make Britain's economy less dependent on consumer demand. Economic think tank NIESR said the industrial output data pointed to 0.9 percent quarterly growth in the economy in the first quarter. That would be the fastest rate since the second quarter of 2010 and an acceleration from 0.7 percent in the last three months of 2013. Michael Saunders, an economist with Citi, said that type of forecast could be set back by upcoming data, including a reading of Britain's construction sector due on Friday. "But so far the signs are that the UK started 2014 with very strong growth," Saunders said in an email note to clients. There were other signs of strength in the economy on Tuesday. A survey by the British Chambers of Commerce showed six key manufacturing balances, including investment plans, hit all-time highs in the first quarter and services were strong too with exports at a record high. A second survey showed British employers are raising the salaries they offer to new permanent staff at the fastest rate in nearly seven years as they struggle to fill vacancies. Britain has a way to go to recover fully from the effects of the financial crisis. Manufacturing remains 8.2 percent smaller than it was when overall economic output peaked in early 2008. It remains to be seen if the strength in manufacturing continues. A survey of purchasing managers published last week showed Britain's factory sector saw its slowest growth in eight months in March. (Additional reporting by David Milliken in LONDON and Anna Yukhananov in WASHINGTON; Editing by John Stonestreet)