Britain's shoppers provide rare glimpse of economic sunshine

Strong retail sales growth and reports of improving demand for industrial exports provided a rare ray of sunshine for the British economy yesterday. Last month's retail sales were up 2.8 per cent by value, and 1.3 per cent by volume, compared with July last year, the Office for National Statistics (ONS) revealed.

The divergence between the two figures reflects relatively high inflation, which is still running at 3.1 per cent. But the 1.3 per cent improvement in retail sales volumes still represents strong growth. Sales at stores predominantly selling food fell by 1.7 per cent year on year.

Sales at non-food shops leapt by 4.1 per cent, with purchases of textiles, clothing and footwear shooting up 5.5 per cent. However, sales of automotive fuel fell by 10.7 per cent by volume. After a dip early in the year, retail sales have risen consistently, despite five consecutive months of falling consumer confidence in the monthly survey conducted by the market research group GfK NOP.

Consumer spending is not the only area of the economy showing signs of revival – manufacturers also report rising demand for UK exports.

In the Confederation of British Industry's Industrial Trends Survey for August, 24 per cent of respondents said their export order books were at higher than normal levels. The CBI said the balance of those reporting export order books above or below normal had rebounded to –1 this month from –12 in July, taking the index close to positive territory.

However, domestic industrial demand is performing less strongly, with only 21 per cent of manufacturers reporting improved order books, compared with 34 per cent reporting levels below normal. Even so, this month's net balance of –14 per cent is still the highest for nearly two years and better than last month.

Respondents expect total production to continue rising in the coming quarter, although an increasing number are predicting price rises, which could both reflect and add to overall inflationary pressures in the economy.

Separate data gave cautionary signals yesterday. Gross mortgage lending remained stagnant last month (it was 5 per cent higher than in June but 3 per cent lower than in July 2009) and is still far below pre-recession norms, the Council of Mortgage Lenders said. Car production also fell for a second consecutive month in July, according to the Society of Motor Manufacturers and Traders.

The SMMT said more than 98,000 cars were produced last month – 8.9 per cent below July 2009 – after the Government withdrew its vehicle scrappage incentive earlier in the year.

Economists warned of the continued fragility of the recovery. "The retail sales numbers suggest that, for now at least, consumers are still spending in the shops, despite facing public spending cuts, high debt levels, restricted access to credit, weak wage growth and high inflation and unemployment," said Jonathan Loynes, of Capital Economics. "But we haven't yet seen the full effects of fiscal tightening, either in terms of tax increases or in terms of the hit to employment and earnings from public spending cuts. It is very likely the pace of consumer spending will slow in the second half of this year and into 2011."

Lee Hopley, the chief economist at the EEF manufacturers' organisation, added: "The big question is whether manufacturers are sufficiently confident about the strength of the recovery to start recruiting and making the necessary investments."