Consumer slide puts brake on new car sales and company profits

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The Independent Online

A weakening in consumer confidence was blamed yesterday for a string of corporate profit warnings and a fall in annual car sales, giving the Bank of England food for thought as it prepares to meet next week to set interest rates.

New car sales declined by 5 per cent last year as private buyers deserted the market in their droves. There was more bad news on the retail front from JJB Sports, which had to issue a profits warning after being forced into a vicious price war. Meanwhile the housebuilder George Wimpey admitted that its UK division had suffered a poor year as the UK property market wilted. Finally, the mail group DX Services blamed a profits warning on a fall in housing transactions, belt-tightening by financial services firms and the downturn in the retail sector.

Although the Bank is widely expected to keep the cost of borrowing unchanged at 4.5 per cent next Thursday, the gloomy news from the high street, the forecourts and the housing sector will provide ammunition for the doves on its Monetary Policy Committee.

The Society of Motor Manufacturers and Traders blamed the second consecutive year of falling new car registrations on lack of consumer confidence, with sales to private buyers down by more than 10 per cent. It also forecast a further decline in overall sales in 2006, saying it would be "another tough year" for the industry.

In its profits warning, George Wimpey said 2005 had been "one of the toughest trading markets in the last 30 years" and cautioned that the housing sector would not improve much in 2006.

The latest corporate trading statements and car sales figures add to what has been a decidedly mixed New Year picture so far.

Consumer credit in November, a key month for trading in the run-up to Christmas, posted its weakest growth in 11 years. Credit card spending halved between October and November.

Optimism among consumers fell to a two-year low in December, dragged down by a fall in people's appetite for making a major purchase.

December also saw a raft of high-profile failures among consumer services firms including Unwins, Tiles R Us and MVC while Canterbury Foods and the clothing retailer Kookai have gone under since start of the year.

But the gloom has been offset by pictures of crowds of people camping overnight ahead of the Boxing Day sales and rises in the number of visitors to major shopping centres. Growth in the service sector, which dominates the UK economy, also reached its highest level for 20 months in December.

Although the high street picture is still unclear, the early trading statements, from John Lewis and Next, were more upbeat than had been expected. John Lewis said total sales rose 24 per cent in the week to Christmas.

"Though admittedly unreliable, most of what we have heard thus far about December has been encouraging," said Malcolm Barr, UK economist at JP Morgan bank.

And while unsecured borrowing was slowing, mortgage lending showed signs of a healthy rebound at the turn of the year.

Approvals for new house-purchase loans hit an 18-month high of 115,000 in November, which economists said could send house price inflation back into double digits by mid-2006.

"There's been something for both the doves and hawks on the monetary policy committee on the early releases of the New Year," said Jonathan Loynes, chief UK economist at Capital Economics. "But the weakness of credit card borrowing seems to support the message that sentiment among households remains pretty fragile."

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