Economy heads for a soft landing as consumer boom cools

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The Independent Online

The Bank of England's prayers for an end to the imbalances in the UK economy may have been answered, figures revealed yesterday show.

High street spending fell unexpectedly for the second month in a row in January while the CBI, the employers' group, said optimism among manufacturers had enjoyed a dramatic rebound.

If the trend continues it could mark a perfect soft landing for the economy and a reversal of the so-called "two speed economy" ­ booming consumer spending despite a manufacturing recession.

A slowdown in high street spending would also make it less likely that the Bank would rush to raise interest rates.

"The CBI survey together with the retail sales numbers seems like the perfect soft landing ­ an industrial recovery as the consumer slows," said John Butler, UK economist at HSBC. "This will take the pressure off the Bank to rapidly reverse the rate cuts."

However, analysts gave a guarded reaction to the figures, which did not fit in with other signals coming from the economy. "It's probably too good to be true," Mr Butler added.

Industry groups went further and said it provided ammunition for the Monetary Policy Committee to cut rates to tackle a wider economic slowdown.

The British Chambers of Commerce said the "door was now slightly more ajar". Ian Fletcher, its chief economist, said: "If the slowdown on the high street continues, consumers might need a helpful nudge from the Bank."

Government figures show retail sales slipped 0.3 per cent in January compared with analysts' forecasts of a 0.7 per cent jump. December's fall, which had also not been expected, was revised up to 0.4 per cent.

It is the first time since autumn 1998 that retail sales have fallen for two consecutive months and a government statistician said the fall could not be "explained away as a blip".

The annual growth rate of 4.2 per cent, down from a peak of 7 per cent in November, was the lowest for a year. One reason could be that retailers were able to push prices higher in January. The price deflator ­ a broad measure of high street inflation ­ rose to 1.1 per cent from minus 0.1 per cent in December.

The weak retail sales contrast with other high street surveys and with separate data showing that consumers took on a record debt burden in January. "What consumers might be doing is switching their expenditure away from the high street and into other services," said Michael Hume at Lehman Brothers. "If it is [the case], then overall spending might be not slowing all that much."

Meanwhile, the monthly survey from the CBI found the number of firms expecting output to rise over the coming months outnumbered those expecting a fall by 1 per cent. The CBI said it might be the first sign the severe squeeze on industry was starting to ease.