High street spending forges ahead: Figures show rising consumer confidence, with car production well up and bank lending buoyant

HIGH STREET spending grew unexpectedly strongly last month, official figures showed yesterday. Shoppers bought much more food, but reined back purchases of household goods despite the biggest July price cuts since 1956.

Betting on an early interest rate rise continued to recede, amid signs that the housing market remains subdued. But other figures showed rising consumer confidence, car production well up on last year and buoyant lending by banks and building societies.

The markets were more interested in the Bundesbank's fortnightly council meeting than in the economic data. The FT-SE index of 100 leading London shares closed 7.7 points lower at 3,182.6, having topped 3,200 at one stage. Gilts ended the day lower, with the benchmark 63 4 per cent stock due 2004 falling pounds 5 8 to pounds 871 8 to yield 8.65 per cent.

The volume of high street trade rose by 0.4 per cent last month, with spending averaging pounds 2.9bn a week, according to the Central Statistical Office. Volume was 3.8 per cent up on the same month a year ago, compared with 3.3 per cent growth in the year to June. The rise in July was dominated by a 1.4 per cent increase in food sales, which the British Retail Consortium attributed in part to the hot weather. But trade at department stores grew only fractionally, as did sales of clothing and footwear - despite the biggest July price cuts for at least 80 years. Household goods sales fell by 0.7 per cent, which analysts blamed on tax rises and the weakness of the housing market.

Net mortgage advances by building societies rose fractionally to pounds 1.16bn in July, but the value of net new commitments - a forward-looking indicator of housing market activity - slipped back about 10 per cent to pounds 3.22bn.

'The figures show that the market remained fairly cautious in July,' said Adrian Coles of the Building Societies Association. 'While the figures are moving in the right direction, it is still too early to claim that a sustained recovery is under way.'

Lending by the big British banks rose by pounds 1.4bn in July, half as much again as in June, according to the British Bankers' Association. Consumer borrowing rose much less quickly in July than June, dominated by a pounds 288m rise in mortgage lending.

The rise in borrowing for consumer spending slowed, with growth in credit card borrowing slumping from pounds 169m in June to pounds 12m in July. But the BBA was encouraged that consumer borrowing had risen for four successive months for the first time since 1991. Manufacturers also paid back less of their debts than in recent months.

Bank and building society lending rose by an unexpectedly strong pounds 2.4bn in July, according to figures from the Bank of England, largely the result of lending to the financial sector. Bank and building society deposits rose by a surprisingly weak 0.1 per cent in the same month, depressed by the selling of more gilts than were needed to finance the gap between public spending and tax revenue.

Michael Saunders, economist at Salomon Brothers, said the figures also hinted that there was a net capital outflow.

Adrian Cooper, economist at James Capel, said the weakness of growth in deposits was another factor suggesting that the Chancellor and the Governor of the Bank of England would agree not to raise interest rates when they meet early next month. 'However, if indicators - most notably, retail sales - continue to point to robust recovery over the next month or so, the Bank of England could well be pushing for a pre-emptive base rate move in the autumn.' Car production continued to show strong growth from last year's levels. Car output in July was 7.1 per cent up on the previous July at 126,494, with export production up by 21.5 per cent to 40,522. Output of commercial vehicles grew even more rapidly.