June 17 (Bloomberg) -- U.K. unemployment rose less than economists forecast in May, adding to signs the worst of the recession may be over.

Claims for jobless benefits rose by 39,300 to 1.54 million in May, the smallest increase since July last year, the Office for National Statistics in London said today. Economists predicted a rise of 60,000, the median of 28 forecasts in a Bloomberg News survey shows. A broader measure of unemployment rose 232,000 to 2.26 million in the three months through April.

The figures are a boost for Prime Minister Gordon Brown as he tries to draw a line under this month's leadership crisis. Evidence of a turnaround in manufacturing and services has prompted some economists to predict the economy may lose fewer jobs than first thought.

``The claimant count is a very encouraging number, and the market has taken this as good news,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``Armageddon is off the table. We may be out of recession in the second quarter, but unemployment is still going to continue rising for at least a year.''

The pound erased declines after the figures and was trading at $1.6376 at 9:36 a.m. in London

The Confederation of British Industry expects unemployment to peak at in the second quarter of 2010 at 3.03 million, a rate of 9.6 percent, instead of the 3.25 million forecast in April.

House prices rose in May, according to reports from lenders Halifax and Nationwide Building Society; manufacturing output rose for a second month in April, and the Chartered Institute of Purchasing and Supply said services expanded for the first time in a year.

Recovery in Sight

While evidence is mounting that an end to the recession is in sight, the government expects the economy to shrink 3.5 percent this year, and forecasters including the International Monetary Fund are more pessimistic. The CBI this week predicted no growth until next year.

Almost one in five people age 16 to 24 are unemployed, and Brown said last week the Labour government will focus on creating jobs. The premier, who has trailed in opinion polls for most of his two years in office, last week put down a revolt over his leadership and rejected opposition calls to hold early elections.

He now faces the prospect of fighting the election, which has to be held by June 2010, with 10 percent of people of employment age out of work for the first time since 1994.

Employment Falls

The ILO jobless rate increased to 7.2 percent in the three months through April, the highest since the quarter through July 1997. That compares with 9.2 percent in the 16-nation euro region in April, 9.4 percent in the U.S. in May and 4.8 percent in Japan in March. The 232,000 increase from the previous quarter was the second largest since 1981.

Employment fell 271,000 in the latest quarter to 29.1 million, the largest quarterly fall since records began in 1971.

Claimant unemployment rose for a 15th month in May, lifting the jobless rate to 4.8 percent from 4.6 percent in April. The increase in April was revised to 49,600 from 57,100.

Lloyds Banking Group Plc, the biggest U.K. mortgage lender, said last week it plans to cut as many as 1,660 full time jobs and shut all 164 of its Cheltenham & Gloucester branches. Axa SA, Europe's second-biggest insurer, said on June 12 it will cut 560 jobs at its U.K. insurance unit.

Business Secretary Peter Mandelson last week flew to Berlin in a bid to save 5,500 jobs at the U.K.-based Vauxhall brand after the German government picked Magna International Inc. to buy General Motors Corp.'s Opel unit. Magna plans to fire as many as 11,100 workers, putting the future of Vauxhall's two plants in doubt.

The threat of job cuts is keeping a lid on wages. Average earnings in the three months through April rose 0.8 percent from a year earlier as banks slashed bonuses. Excluding bonuses, earnings grew 2.7 percent, the least since records began in 2001.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.

Last Updated: June 17, 2009 04:47 EDT