April 24, 2008 / 1:26 PM / 12 years ago

Economy slows but consumers resilient

LONDON (Reuters) - Manufacturers and housebuilders delivered further evidence on Thursday of a sharp economic downturn, although official figures suggested consumers are showing surprising resilience.

Big Ben is seen as snow falls in London, April 6, 2008. Manufacturers and housebuilders delivered further evidence on Thursday of a sharp economic downturn, although official figures suggested consumers are showing surprising resilience. REUTERS/Alessia Pierdomenico

The Office for National Statistics said retail sales volumes dipped 0.4 percent in March, broadly as expected, but upward revisions to back months lifted the annual rate to a pacey 4.6 percent.

The three-month on three-month growth rate, seen as a better gauge of the underlying trend, rose to 2 percent — the highest rate since July 2006.

The official retail sales data has puzzled many economists who expect tighter credit conditions, rising household bills and falling house prices to crimp consumer spending this year.

“Today’s numbers confirm a picture of robust strength on the High Street in the first quarter of this year which is totally at odds with anecdotal evidence from companies, retail surveys and consumer confidence measures,” said David Page at Investec.

“We are slightly at a loss to explain the strength in the official sales numbers.”

Some analysts suggested the strength of retail sales over the quarter could mean Friday’s first estimate of gross domestic product growth, forecast to slow to 2.6 percent year-on-year from 2.8 percent at the end of last year, surprises to the upside.

However, a survey of manufacturers by the Confederation of British Industry painted a far more gloomy picture. Order books in April were in their worst shape since October 2006, having deteriorated on the month at the sharpest rate on record.

HOUSEBUILDERS UNDER PRESSURE

The largest housebuilder, Persimmon, said housing market conditions had deteriorated rapidly over the past few weeks and warned revenues this year would fall by a quarter.

The gloomy update sparked a sell-off in other housing related stocks. Barratt Developments fell more than 13 percent to a six-year low, Taylor Wimpey was off nearly 10 percent to an eight-year low and Bovis Homes slid nearly 6 percent to a four-year low.

“Over the last three weeks the unprecedented tightening in the mortgage market has caused a further deterioration of the housing market, leading to lower sales volumes and increased cancellation rates,” Persimmon warned.

House prices have been falling on a monthly basis since the end of last year as the credit squeeze has exacerbated affordability pressures after a decade-long boom.

The downturn appears to be gathering pace. Halifax, the biggest mortgage lender, said house prices fell last month at their fastest pace since 1992 when the country was in the grip of recession.

The Bank of England unveiled an ambitious plan this week to swap banks’ hard-to-trade mortgage assets for government securities in a bid to cushion the economy from the global credit squeeze.

It has also cut interest rates three times since December. Its scope to deliver further rate cuts, however, is being limited by rising price pressures.

The CBI survey showed manufacturers were putting up prices at the fastest rate in 13 years, attempting to counteract the effect on their margins of the sharpest rise in input costs since 1990.

With consumers finding it harder to borrow and global commodity price inflation pushing up the prices of household essentials, retailers questioned the official sales data. “These figures paint an overly rosy picture,” said Stephen Robertson, Director General at the British Retail Consortium. “It is taking deep and widespread price-cutting to tempt customers to buy anything other than non-essentials.”

Additional reporting by Sumeet Desai and Matt Falloon; Editing by Ruth Pitchford

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