By Sven Egenter and Matt Falloon
LONDON (Reuters) - The number of Britons on unemployment benefits dropped in August by the largest amount in two years as companies created new jobs, raising hopes that improved prospects will allow consumers to spend more and get the recovery going.
Britain's economy has been mired in recession since late 2011 official figures show, but it looks set to post some growth in the third quarter, although it is unlikely to be a roaring rebound.
Employment rose to the highest level in over four years between May and July, providing rare relief for the government, under fire for its tough austerity program and facing calls to kick-start a meaningful recovery.
The slightly brighter picture raises questions about the need for more Bank of England stimulus, and policymaker Ben Broadbent, who voted against the current easing round, said policy should focus more on job trends than on output growth.
The number of people claiming jobless benefit fell by 15,000 last month, the Office for National Statistics (ONS) said, beating even the most optimistic economists' forecast.
The London Olympics may have helped to create jobs and bring unemployment down, the ONS said.
Many economists took the job numbers as another indication that the economy may be slowly moving out of recession.
"With euro zone break-up fears fading and the U.S. set to unveil further stimulus tomorrow, the hope is that we will start to see more optimism in the corporate sector on economic prospects, which can lead to a further strengthening of the UK's jobs market," ING economist James Knightley said.
However, others sounded a note of caution about any boost to consumer morale and spending as those moving out of unemployment did so at a cost.
"People are pricing themselves into work through weakness in pay and the shift to less secure and less well-paid forms of work (such as) self-employment, part-time work, temporary jobs," said Citi economist Michael Saunders. "It is no surprise that, even with the gains in jobs, consumer confidence remains weak."
ONS figures showed that average weekly earnings including bonuses grew by 1.5 percent, still lagging inflation, which is eating into Britons' spending power and dampening consumption.
The number of people without a job on the wider ILO measure ticked down by 7,000 in the three months through July to 2.592 million compared to the February-April period.
However, the number was higher than the 2.56 million unemployed reported for the April-June period. The latest ILO jobless rate stood at 8.1 percent.
PUBLIC SECTOR CUTS
The resilience in Britain's labor market has been a puzzle for most economists and the Bank of England, who are wondering how an economy in recession can create jobs.
Policymaker Broadbent urged his colleagues to pay closer attention to jobs when assessing inflation risks and future policy: "We're likely to want to ease policy if employment falls and to tighten it if employment growth improves.
Most economists expect the central bank to increase its purchases of government bonds with newly created money by another 50 billion pounds, beyond the current total of 375 billion pounds, when the ongoing 50 billion pound easing round is completed in November.
However, none of the policymakers who made public comments over the past few weeks showed any outright support for more quantitative easing. Even the most dovish policymaker David Miles said he was "open-minded" about more stimulus.
Recent surveys have indicated that most sectors are stabilizing and companies are planning to step up hiring in the months to come despite an uncertain economic outlook.
The government is hoping that private companies create enough new jobs to make up for job cuts in the public sector, which are part of its plans to erase a huge budget deficit.
The ONS said the number of public sector employees fell by 235,000 in the second quarter to 5.66 million, the lowest since 2001, although most of that drop was due to educational organizations being transferred to the private sector.
(Additional reporting by Olesya Dmitracova and David Milliken; editing by Jason Neely)