Retailers hit by worst fall in 10 years

Economic uncertainty: Surveys add to fears that conflict in Iraq may undermine any nascent recovery

The high street boom ended with a bang last month as sales volumes fell at the fastest rate for a decade, according to a survey of leading UK retailers published yesterday.

The Confederation of British Industry said it was a clear sign of the impact of the uncertainty over the war as the polling ended the day before the outbreak of hostilities.

The CBI said it was the lowest balance since July 1992, when the economy was emerging from recession and was the first "significant" fall since January 1999.

The war also prompted manufacturers to retrench last month – a picture that was reflected in the eurozone, the United States and Japan.

The gloomy surveys will add to fears over the likely length of, the conflict in the Middle East and how much that will undermine any nascent economic recovery. The figures are likely to alarm the Bank of England, which has indicated it will cut rates again if there is renewed fears the UK is heading for recession.

However, the financial markets ignored the impact of the data to push stocks higher and cut the price of oil, gold and bonds in a marked reverse of previous days' trading.

The FTSE 100 closed 71 points or 2 per cent higher, the oil price in the US came close to breaking back though the $30 a barrel barrier and gold fell by almost a dollar to $334 an ounce.

The CBI said sales growth had stalled in almost every corner of the high street with only retailers of DIY and hardware experiencing significant sales growth. "Sales of duct tape perhaps," joked one analyst.

Ian McCafferty, the CBI's chief economic adviser, said: "These results confirm our fears that consumer confidence has been affected by uncertainties surrounding the war in Iraq, the impending tax rises and worries about the housing market."

Significantly, retailers have abandoned their traditional optimism for the future, forecasting zero growth in sales over the coming few months for the first time in eight years.

Meanwhile, activity in the manufacturing sector fell in March at the fastest pace for 15 months as order books shrank and rising raw materials costs squeezed profits.

The Chartered Institute of Purchasing and Supply, which polls executives every month, said its index dropped to 46.1 on a scale where 50 is the borderline between contraction and expansion.

"Falling orders books were widely reported to have reflected uncertainty prior to the declaration of war in Iraq," said Roy Ayliffe, a director of CIPS. "This war has come at a very bad time for manufacturing industry."

The picture was equally gloomy across the Channel where manufacturing industry in the eurozone also contracted in March.

Unemployment in the European Union hit a three-year high in February while French consumer confidence fell to a six-year low in March.

US manufacturing contracted in March for the first time in five months while confidence among Japan's large manufacturers fell for the first time in more than a year.

Analysts said the surveys, which have recently been given much weight by central banks, will raise speculation of further rate cuts as soon as this month.

The European Central Bank sets rates tomorrow but it is expected to wait a month for the "fog of war" to clear before cutting. The Bank of England is expected to cut rates but to wait until May. Some economists said a similar fall in the service sector survey, published tomorrow, would be enough to prompt it to act next week.

A survey last week of 25 economists by Reuters published yesterday showed the average forecast for GDP was cut to 2 per cent this year and 2.5 per cent in 2004 from 2.5 and 2.8 per cent respectively.

A key task for the Bank's monetary policy committee is to disentangle the "war effect" from a wider and more worrying economic slowdown.