Britain 'needs a recovery by Germany': Clarke warns as high street spending improves sharply

KENNETH CLARKE, the Chancellor of the Exchequer, warned yesterday that it would be difficult for Britain to sustain its recovery without a revival in the German economy. His comments came as a survey by the Confederation of British Industry showed a big rise in high street spending last month.

More than half the retailers questioned in the latest CBI distributive trades survey said sales volume in June was up on a year earlier, with fewer than a quarter reporting that volume had fallen. This was a sharp improvement on the previous month and a more buoyant picture than at any time for more than three years.

But the CBI warned that trade had been boosted by an early start to the summer sales, with the patchy improvement concentrated in large stores. Smaller chains and single-store retailers still reported trade more depressed than a year ago.

Grocery, clothing, furniture and chemists saw the fastest sales growth, with off-licences and hardware stores the most depressed.

Nigel Whittaker, chairman of the CBI's distributive trades panel, warned that although retailers expected July to be another good month they had been over-optimistic in recent months. Official figures for June retail sales will be published tomorrow, with City analysts expecting a rise of 0.3 per cent on the month.

Mr Clarke issued his warning about the need for a German recovery in Frankfurt before meetings with Hans Tietmeyer, president-designate of the Bundesbank, and Theo Waigel, the finance minister. He said German businessmen to whom he had spoken were 'pretty optimistic about a German recovery next year'.

Mr Clarke did little to dampen speculation in Britain about a widening of the value-added tax net to cover some zero-rated goods. While stating that there were 'currently no plans to expand the VAT base in the UK', the Chancellor added: 'I must keep all my taxation options open.' He said the Government's principal job was to see improvements in public finances.

'Keeping interest rates down in the UK, and no doubt in Germany as well, will also depend on our success in tackling fiscal deficits,' he said.

The Chancellor denied he had any intention of exerting pressure in favour of further cuts in German interest rates. He expressed understanding for the German point of view, and especially its problems with inflation.

'I have more time for the Bundesbank than many of my political colleagues at home,' he said.

But, coincidentally, hopes of a cut in official German interest rates on 29 July were boosted by Bundesbank repurchase agreements to drain excess cash from the money market. These suggested the Bundesbank would cut its key 'repo' rate from 7.28 to 7.15 per cent this week, heralding a cut in the offical discount rate - the floor for market rates - later in the month.

The Bundesbank's move helped to calm recent turmoil in the European exchange rate mechanism, with the Danish krone and French franc enjoying a quiet day.

Mr Clarke said it would be helpful if German interest rates were to come down, but this would not necessarily be followed by an easing in British base rates.

He vigorously defended Britain against accusations from some quarters in Germany that it is seeking to gain a competitive edge by turning itself into a low-wage country.

Developing the theme of a speech he was to give later in Munich, Mr Clarke said Britain believed in well- paid, high-technology industries and a high standard of social provision, but this should not be confused with those twin enemies of growth, rigid markets and excessive costs. The most important issue facing the European Community was job creation.

'Labour markets are the crux of Europe's economic woes - over-rigid, over-regulated and over-priced,' he said. The first step for EC governments must be to look at the extra costs forced on business through excessive regulation.

Businesses all over Europe had warned governments that more social charges would kill enterprise and kill employment. In opposing the Maastricht Social Chapter, Britain was speaking out on behalf of the unemployed throughout the EC.

View from City Road, page 22

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