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Growing Signs the UK Economic Recovery Is Real

Clouds over the City of London
Gregory Warran | Flickr | Getty Images
Clouds over the City of London

If car sales are any sign, Britain's economy is doing just fine. U.K. consumers bought more cars last month than in any May since 2005. Those numbers, plus a raft of positive data on Thursday, helped spur a rally in the pound.

Car sales, including company fleet purchases, rose 11 percent compared to a year ago, marking a "significant milestone" for the economy said Mike Baunton, chief of car trade body The Society of Motor Manufacturers.

At the same time, U.K. bank Halifax said house prices in the country are rising at the fastest rate in over two years as government measures, including the "help to buy" scheme unveiled in this year's budget in April, had boosted demand.

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On Wednesday, Purchasing Manager's Index (PMI) data showed Britain's key services sector grew much faster than expected in May, underpinned by the sharpest rate of new business growth in more than three years.

Samuel Tombs, U.K. economist at Capital Economics said the signs were good, though he remained skeptical about how sustainable the turnaround was.

"It is hard to deny that there have been some good signs of recovery in the last month or so. The latest [PMI] surveys that we have had for a period in May for manufacturing, construction and services sector all improved," he said.

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"But we are not convinced that recovery is going to maintain that kind of pace – for a start the data coming out of the labor market has been a lot weaker than it has been for some time, with employment and earnings falling and we also think inflation is going to rise in the next few month which will intensify the squeeze in household budgets."

One sector which has experienced the strongest recovery in recent months is housing.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (RICS), told CNBC the feedback he has been seeing in the last few months pointed to a shift in housing sentiment.

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"We have to separate the regional spin, because London as we all know has been pretty buoyant for some time. So we are sensing there is now some significant spill-over effects out of London to other parts of the country," he said.

In the currency market, the pound has also been rallying. Sterling reached a fresh four-week high against the dollar, rising 0.4 percent to hit $1.5465, its strongest level since May 9. Against the euro, it fell 0.2 percent to a two-week low of 84.80 pence.

But Geoffrey Yu, FX strategist at UBS said the rally would not last for long.

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"Even if the U.K. begins to deliver in terms of growth, we are still coming off really low levels, so the pound will still underperform against the dollar," he told CNBC.

"Versus the euro, it is a different story, relative performance for the U.K. is looking better, so the euro may still have some downside."

By CNBC.com's Jenny Cosgrave; Follow her on Twitter @jenny_cosgrave