Mortgage approvals hit their lowest in at least 15 years in July and the manufacturing sector shrank for a fourth straight month in August, surveys showed today."Prospects for the UK economy remain grim," said Michael Saunders, a Citigroup economist. "The economy is probably in recession now and no early recovery worth the name is likely in 2009."



The weak readings drove the pound down to its lowest against the dollar since April 2006 and interest rate futures rallied sharply, anticipating Bank of England rate cuts as the British economy flirts with its first recession since the early 1990s.

Chancellor Alistair Darling reiterated government warnings on the economy in an interview with a weekend magazine, raising speculation he will slash his economic forecasts in the pre-budget report due in the coming months.

That interview was published just a few days after Bank of England policymaker David Blanchflower told Reuters two million people could be out of work by Christmas and that big interest rate cuts were needed to avoid a prolonged slump.

The government will outline proposals to help the housing market tomorrow which will likely include giving local authorities money to buy repossessed properties. Further measures to help people with rising utility bills could come later in the week.

The Bank of England said today mortgage approvals -- an indicator of future movements in house prices -- fell to 33,000 in July from 35,000 in June, the 12th consecutive decline and the lowest since the series began in April 1993.

Mortgage lending grew at its weakest annual pace since June 1999.

"It's at a painfully low level so we are still facing the prospect of falling prices for at least another year," said Alan Clarke, an economist at BNP Paribas.

All sections of Britain's economy are now feeling the squeeze -- including the manufacturing sector which the Bank of England had hoped would benefit from a weaker pound boosting exports.

The Chartered Institute of Purchasing and Supply's purchasing managers' index showed the factory sector contracted for a fourth month in a row in August, although less sharply than expected at 45.9, up from 44.1 in July.

However, much of the improvement was down to firms concentrating on filling old orders. Demand from both overseas and at home continued to decline.

The Engineering Employers' Federation said manufacturers are bracing for a sharp fall in orders and weaker profit margins.

"Manufacturing has shown considerable resilience in the face of a credit crunch, a global economic slowdown and a massive increase in its costs," said Steve Radley, EEF chief economist. "But there are now clear signs that these pressures are starting to take their toll."

The CIPS survey showed manufacturers were ramping up prices at the fastest since the series began in 1999, as firms continue to pass on some of the impact of their soaring costs.

That will worry the central bank, which is facing growing public and political pressure to cut borrowing costs from the current 5.0% despite the strongest inflation since the BoE was granted the power to set interest rates in 1997.

"Financial markets are increasingly looking for rate cuts by the end of the year, but we continue to narrowly favour the BoE holding off until early 2009," said James Knightley, an economist at ING.

"With inflation already likely to rise above 5% following the latest utility bill hikes, we think the BoE as a whole will remain cautious."