Better-than-expected unemployment figures and a rosier growth forecast from the Bank of England raised hopes yesterday that Britain was beginning to claw its way towards economic recovery.

Analysts tore up previous warnings that unemployment would hit three million next year as official figures showed a significant slowing in the speed at which people are losing their jobs. Though the jobless total rose by another 30,000 to 2.46 million in the three months to September, the rise was much smaller than the 65,000 predicted and represented the lowest quarterly increase for 16 months.

However, concerns persisted about the one in five young people out of work. The number of jobless 18 to 24-year-olds increased by 24,000 to 746,000, or 18 per cent, the highest level since records began in 1992.

Including 16 and 17-year-olds, total youth unemployment was 943,000, a record rate of 19.8 per cent.

Mervyn King, Governor of the Bank, said Britain had “only just started along the road to recovery” and that it would be “a long hard haul” back to regain the level of activity of two years ago before the financial crisis hit. In its central forecast, the Bank is now predicting that the economy will start to grow again at the beginning of next year and pick up speed to reach a lively 3.75 per cent by the middle of 2011. This is more optimistic than the predictions in the Bank’s last Inflation Report in August.

Mr King said he had since grown more confident because of the millions of pounds of so-called quantitive easing pumped into the economy by the Bank had worked.

He played down the significance of last month’s figures showing that Britain was still in recession in the third quarter, saying he expected them to be revised upwards.

But while the Bank was more confident about a pick-up in growth, it was comparatively relaxed about the medium-term threat of inflation. It warned that there would be a short-term surge in inflation because of higher petrol prices and the planned return of VAT from 15 per cent to 17.5 per cent on January 1, but then inflationary pressures would ease.

Shares in London raced to within a whisker of a high for the year while the pound slid by more than a cent against the dollar at one point on expectations that base rate would remain at its historic low of 0.5 per cent for many more months.

With the next government, of whatever political hue, likely to cut spending and possibly raise taxes further than the level factored into the Bank’s existing sums, there was considerable scope for a long period of low interest rates, analysts suggested.

The 30,000 rise in Britain’s overall unemployment in the three months to September compares with a 205,000 rise in the previous quarter, prompting some economists to reduce their forecasts sharply.

Howard Archer, chief economist of analysts IHS Global Insight, said: “These figures are substantially better than we expected and I think the main reason is that companies and employees are more willing to work part-time and to take pay cuts or freezes than they have been in previous recessions — so companies can lay off fewer staff.” But youth unemployment remained a serious problem, he said, arguing that the rises might have been higher still if a substantial number of this year’s school and college leavers had not opted to take time off or travel to delay looking for a job.

Although the unemployment figures were widely welcomed yesterday, economists cautioned that the outlook for Britain’s economy remained tough for the foreseeable future. They predicted that unemployment was likely to continue to rise for most, if not all, of next year, since any fall in joblessness would lag an economic rebound by several months.

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