December 19, 2008 / 10:31 AM / 10 years ago

Retail sales rise contrasts with wider gloom

LONDON (Reuters) - A surprise pick-up in retail sales last month met with scepticism on Thursday, given mounting evidence the economy is deteriorating and growing belief interest rates may have to fall to zero to spur spending.

A surprise pick-up in retail sales last month met with scepticism on Thursday, given mounting evidence the economy is deteriorating and growing belief interest rates may have to fall to zero to spur spending.REUTERS/file

The Office for National Statistics said sales volumes rose 0.3 percent last month, confounding forecasts for a 0.6 percent decline and flying in the face of anecdotal evidence that consumers are tightening their belts.

Separate figures showed public sector borrowing hit a record high of almost 16 billion pounds last month, even before the government’s recent fiscal stimulus measures kick in, heaping pressure on the pound and heightening concern over how much it will cost the UK government to fund its plans.

One possible reason for the discrepancy between official retail data and informal surveys is that the ONS figures capture internet shopping more fully.

On the High Street, stores have slashed prices to lure in shoppers as soaring unemployment, tight credit and a crumbling housing market have led Britons to clamp down on spending. A survey by the Confederation of British Industry showed sales in early December were their weakest in at least 25 years.

And a slew of profit warnings from stores, along with the collapse of High Street stalwart Woolworths with the loss of 27,000 jobs, are further proof that Britain’s recent consumer-led boom has come to an abrupt end.

“The Monetary Policy Committee has already indicated that it is paying little attention to these figures and we have been taking the same approach,” said Vicky Redwood at Capital Economics. “We still think that Christmas will be pretty awful for retailers and that things will get even worse next year.”

Britain is probably on track for its worst recession since the early 1980s and the Bank of England has knocked 3 percentage points off borrowing costs since October to shore up demand. BoE Deputy Governor Charlie Bean said Thursday it was possible interest rates could hit zero.

The U.S. Federal Reserve sliced its target interest rate to between 0.25 percent and zero this week, fuelling speculation that policymakers in Britain would have to do the same.

“Of course, interest rates, the Bank Rate, is still at 2 percent, so we still have some margin to go yet, but of course we may find ourselves getting all the way to near zero,” Bean told the Financial Times.

OUTLOOK GLOOMY

Talk of further interest rate cuts has battered sterling in recent weeks, plunging it to record lows against the currencies of Britain’s main trading partners and driving up the price of imported goods.

Finance minister Alistair Darling said the weaker pound should help support exports, however.

Carmakers, too, have suffered from consumers’ retrenchment, but Darling dampened hopes of a government bail-out for the sector.

“We will do everything we reasonably can do to support the industry, but the primary responsibility for financing a company arises from those who actually own the company,” he told parliament.

And Thursday brought further gloomy news on the housing market. The Council of Mortgage Lenders said gross home loans slumped 51 percent in November from a year ago.

It also expects more people to have trouble meeting their monthly repayments, even as official borrowing costs fall.

“With unemployment rising sharply and households looking to tighten their budgets we expect to see further weakness in the data over coming months,” said James Knightley, economist at ING. “This will keep up the pressure on the BoE to continue cutting rates.”

Additional reporting by Matt Falloon; Editing by Ruth Pitchford

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