It's official: Britain is on the way back

Britain is on the road to economic recovery, the Governor of the Bank of England said today.

But Mervyn King introduced a note of caution by warning that we had "only just started" to make progress after the longest recession on record.

The smallest rise in unemployment since the start of the slump in spring last year triggered the optimism. The jobless total rose 30,000 in the three months to September to 2.46 million, or 7.8 per cent of the working population.

The Bank fuelled the upbeat feeling by forecasting that Gross Domestic Product could be growing by a healthy four per cent by the end of next year as "buoyant" Britain bounces back. The City caught the mood with the FTSE-100 index of leading company shares rising almost 70 points to break through the 5300 barrier.

Previous gloomy forecasts that unemployment would smash through the three million barrier next year are now being revised by economists. The figures show that many workers who were made redundant are coping by taking part-time roles that keep them out of the dole queues.

Forecasts that youth unemployment would hit one million also proved wide of the mark. The number of 16 to 24-year-olds without work rose by 15,000 to 943,000, still a record level of almost one in five of those available for work, but fewer than feared. Mr King said that while many economic pointers suggested recovery was under way it would be a long time before the economy is as strong as it was before the crash.

He said: "Last November, the full ramifications of the financial crisis were just starting to become clear. The banking system was in near meltdown. Output, orders and confidence had fallen off a cliff.

"We have come a long way since then, helped in part by the extraordinary policy actions that have been implemented. We have, however, only just started along the road to recovery."

His caution led some commentators to suggest that the Bank of England will keep its interest rate at the record low of 0.5 per cent until the end of next year and would continue with its "quantative easing" programme of pumping money into the banking system. Business leaders welcomed the better than expected jobless figures.

John Cridland, deputy director-general of the CBI, said: "It is encouraging that today's figures are not quite as bad as many predicted. However, we expect unemployment will keep rising, and peak next spring. The record rate of joblessness among 16 to 25-year-olds continues to be a major concern. The Government must act fast to prevent a generation of young people being scarred by unemployment. Funds should be targeted at creating apprenticeships, and supporting employers that do so during difficult times."