December 16, 2011 / 7:22 AM / 8 years ago

Solid retail sales offer rare economic hope

LONDON (Reuters) - Retail sales held up unexpectedly well in recent months and car production rose in November, providing a glimmer of hope that Britain might avoid a new recession.

Shoppers carry purchases on Regent Street after it and Oxford Street were closed to vehicle traffic for a pre-Christmas shopping weekend in London December 11, 2011. REUTERS/Toby Melville

But a sharp drop in factory orders in the Confederation of British Industry’s November survey offered a stark reminder of the dangers ahead as the debt crisis in the euro zone — Britain’s main trading partner — rages on. Mortgage lenders also predicted more Britons would lose their homes next year.

Growth forecasts for the British economy have been slashed in recent weeks and a Reuters poll on Wednesday found an even chance of a new recession within a year.

With the government committed to austerity including public sector jobs cuts to slash a record budget deficit, the Bank of England has been left almost alone to try to stimulate growth via record low interest rates and asset purchases.

The country’s retailers are under heavy pressure and discounting on the high street has been rife in the key pre-Christmas trading period. Consumers are holding back spending as price rises outstrip wages, while growing unemployment and economic bad news have undermined morale.

The Office for National Statistics said on Thursday that despite a monthly drop of 0.4 percent in November, retail sales volumes rose 0.7 percent over the past three months compared to the three months before — the strongest gain since August 2010. Excluding fuel, retail sales dropped 0.7 percent on the month — more than analysts had forecast.

“Retail sales have posted a fairly firm run over the prior months, so it’s not at all that surprising to see a retracement of volumes in November,” said Investec economist Philip Shaw.

“But the outlook for the economy and consumer spending specifically remains uncertain.”

Prospects for the British economy are poor and growth is expected to stay well below 1 percent next year. Policymakers have warned the economy may shrink in the final quarter of 2011 as the euro zone crisis hits confidence and exports.

But car manufacturers — one of the few bright spots amid the gloom — cranked up production by 8.5 percent in November compared to last year.

“UK vehicle and engine production continues to lead a manufacturing recovery,” said Paul Everitt, chief executive of industry lobby group SMMT. “Despite the challenges in the euro zone, the UK motor industry expects further growth in 2012.”

The outlook for manufacturers overall is less rosy. The CBI’s survey showed that companies’ order book balance fell to its lowest level in November in over a year.

“The survey suggests that manufacturing output is continuing to contract at a brisk pace and raises the chances that the sector has dragged the overall economy back into recession,” Capital Economics analyst Samuel Tombs said.


Markets brushed aside the economic data, as movements in gilts and sterling remain driven by the events in the euro zone.

Consumers’ reluctance to spend has hit retailers hard and a number of well known firms have collapsed. Even giants like supermarket chain Tesco are feeling the pain.

Retailers are nervous in the run-up to Christmas. On Tuesday, Carpetright CATVU.L, Britain’s biggest floor coverings retailer, posted its worst first-half performance ever as a listed company.

Some firms are coping better than others, however. Sports Direct SPD.L, the UK’s biggest sporting goods retailer, posted a 2 percent rise in first-half profit and said it was on track to meet its target for the year.

John Lewis BB90_p.L , Britain’s biggest department store chain, reported on Thursday that its sales were up 4.7 percent year-on-year in the four days ended December 14 and said it was gearing up for last-minute rush before Christmas.

The Bank of England, which launched a second round of asset purchases in October to support the economy, expects some relief for consumers next year when inflation is seen falling sharply.

The BoE’s November inflation attitudes survey showed that average public inflation expectations for the next 12 months edged down to 4.1 percent, compared to the three-year high of 4 .2 percent in the August poll and the BoE’s 2 percent target.

The survey found satisfaction with the BoE fell to a record low last month, although more Britons still think it does a good job than a bad one.

But with unemployment at its highest level in 17 years, a renewed slump looming and banks reluctant to lend, consumers look unlikely to give the economy a major boost any time soon.

The Council of Mortgage Lenders said on Thursday it expects house repossessions to rise in 2012 as more cash-strapped households struggle to meet payments. However, the number of repossessions is still likely to remain below the level of 2009 and far lower than in the downturn of the 1990s, the CML said.

Additional reporting by James Davey, David Milliken; Editing by Catherine Evans

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