U.K. Mortgage Approvals Drop, Manufacturing Contracts

By Brian Swint and Jennifer Ryan

Sept. 1 (Bloomberg) -- U.K. mortgage approvals dropped to the lowest since at least 1999 and manufacturing contracted for a fourth month as the economy staggered toward a recession.

Banks granted 33,000 loans for house purchases in July, the fewest since comparable data began nine years ago, the Bank of England said in London today. An index based on a survey of factories by the Chartered Institute of Purchasing and Supply stayed below 50 in August, indicating contraction.

Prime Minister Gordon Brown will announce measures this week to shore up the economy as the Bank of England battles the fastest inflation in more than a decade, which may prevent it from cutting the main interest rate on Sept. 4. The squeeze on lending stalled economic growth in the second quarter and damaged the housing market, where prices are falling by the most since at least 2001.

``We're in for a prolonged period of weak growth that will likely go into a recession,'' said Amit Kara, an economist at UBS AG in London who formerly worked at the central bank. ``There's an argument for cutting rates this week but I don't think they will because of increasing inflation pressures.''

The pound fell to the lowest level since April 2006 against the dollar today and traded at $1.8033 as of 11:48 a.m. in London. The currency dropped to a record low against the euro and traded at 81.19 pence per euro. U.K. stocks declined for the first time in four days.

The Bank of England reported that the value of home loans rose to 3.23 billion pounds ($5.83 billion) in July from 3.14 billion pounds in June. The figure is down from 9.35 billion pounds in July 2007.

Housing Decline

Hometrack Ltd. said today the average cost of a residential property in England and Wales slipped 5.3 percent from a year earlier in August. A recovery in prices is ``still some way off,'' said Richard Donnell, director of research.

The slump has led to a collapse in support for Brown since he took over from Tony Blair 15 months ago and reduced the popularity of the ruling Labour Party to the lowest since it took office. Labour trailed behind the opposition Conservative Party, led by David Cameron, by 20 percentage points in recent opinion polls.

Brown will hand U.K. local government authorities money to buy homes, a person familiar with the plan said last week, as part of a package to prevent the economy entering its first recession since 1991. Chancellor of the Exchequer Alistair Darling said in a Guardian newspaper interview Aug. 30 that the U.K. is facing ``arguably the worst'' economic crisis for the last 60 years.

Darling's comments contrast with those of Prime Minister Gordon Brown, who said Britain is better placed to weather global economic storms now than in the late 1970s and in the early 1990s.

Credit Squeeze

``After a massive debt-fuelled boom in asset prices and spending over recent years, the hangover of high debt levels among households and companies are now likely to trigger an extended period of falling asset prices,'' Michael Saunders, chief western European economist at Citigroup Inc. in London, wrote in a note today. ``The erosion of real incomes and profits from high commodity prices just adds to the pain.''

Financial institutions are reluctant to lend to one another almost a year after a freeze in interbank lending. Bank losses from the collapse of the U.S. subprime mortgage market now exceed $500 billion.

Oil prices, which surged to a record in July, are damping demand for manufactured goods and squeezing factories' margins. The euro area, Britain's biggest export market, contracted 0.2 percent in the second quarter. The U.K. failed to grow for the first time since 1992.

The Chartered Institute of Purchasing and Supply's index of manufacturing stood at 45.9 after 44.1 in July, the lowest since December 1998. Economists predicted 44, the median of 31 forecasts in a Bloomberg News survey showed. Readings below 50 signal contraction.

All 61 economists in a Bloomberg News survey predict the central bank will leave the key rate at 5 percent for a fifth month on Sept. 4.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.