May retail sales slip by 0.2%: City predicts interest-rate cut if recovery remains uneven

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HIGH street sales fell by 0.2 per cent in May for the second month in a row, suggesting the recovery in consumer spending may be running out of steam.

The fall in retail sales volumes brought renewed City predictions that Kenneth Clarke, the new Chancellor, would sanction another cut in interest rates if further evidence of an uneven economic recovery piled up.

Some analysts are forecasting that the May jobless figures today will bring the first rise in unemployment in four months.

Several analysts thought Mr Clarke's Mansion House speech on Tuesday signalled that the Chancellor would place a higher priority on restoring growth than on keeping inflation at 30-year lows in the long run.

But the sales figures followed a sharper-than-expected surge in factory output, which suggested to some analysts the recovery was more likely to be led by manufacturing and exports than by consumption, which sucks in imports. A Treasury spokesman said: 'Sales look basically flat in the first five months of the year, but are holding above last year's levels, after a sharp step upwards after Christmas.' If manufacturing strength and maintained consumer spending held up, 'that's a good balance for the recovery'.

In the financial markets there was only a brief flurry of speculation that rates would soon be reduced. The FT- SE 100 index closed 13 points higher, at 2,883.0. The pound closed virtually unchanged at DM2.4922 but hopes of lower German rates pushed the mark almost two pfennigs lower against the dollar, which closed at DM1.6560.

The fall in retail sales volumes coincided with fresh evidence of the continuing impact of recession. Sluggish Inland Revenue receipts, the absence of any privisation receipts and higher-than-expected public spending resulted in a public sector borrowing requirement of pounds 5bn for May. This brought the PSBR for the first two months of the financial year to pounds 9.7bn and indicated that government borrowing is probably on track for the Treasury's forecast of pounds 50bn for the full financial year.

A clearer picture of slowing consumer spending growth meanwhile emerges from the three-month comparisons, after adjustment for seasonal influences. In the three months to May, sales volumes rose by 0.8 per cent over the previous three months. This is the lowest since February and down sharply from 1.4 per cent in April and 1.6 per cent in March.

The Central Statistical Office said bad weather resulted in a fall in sales for clothing and footwear stores, while sales by specialist non-food retailers, such as off-licences, newsagents, tobacconists, chemists and photographic stores, edged down gently and DIY goods also suffered.

The Retail Consortium, which represents more than 90 per cent of the industry, painted a more optimistic picture, although it compared sales volumes with a year earlier rather than with the previous month. The consortium said there was a healthy rise in sales of food and drink and better sales for pharmaceuticals, furniture and carpets, electrical and electronic goods.

Roger Bootle, chief economist of Midland Global Markets, said: 'My suspicion is that after the initial burst of sales early this year, associated with heavy price discounting, things are getting pretty flat and the initial momentum has worn out.'

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