'Shocking' sales results from M&S deepen fears of recession in UK

Pressure mounts for rate cut; Forward sales slump at Persimmon; UK economy 'vulnerable'

Fears of a consumer recession hit stock marketsyesterday after Marks & Spencer's third-quarter trading results were described as "shocking" by analysts, while the influential World Economic Forum warned that the UK economy was "particularly vulnerable to financial turmoil".

The Bank of England's Monetary Policy Committee will announce its decision on interest rates at noon today against a background of a rapidly cooling economy.

Sir Stuart Rose, M&S's chief executive, made little effort yesterday to disguise the pain that the high street is enduring: "It is fair to say we are in for a tough time. The market has woken up to the fact that the economy has caught a cold. There has been a little bit of hope in the market that things are not as bad... but all this is saying is that things are tougher. We are clearly not in a recession, but it is the toughest we have seen in a decade."

The World Economic Forum, best known for its meeting of global political, financial and business leaders in the Swiss resort of Davos, declared that "a recession in the United States cannot be excluded in the year ahead, and economists are divided about whether domestic-led growth in Asian markets can drive the global economy. Diversification of risk may have strengthened stability in good times, but systemic financial risk remains acute".

However, it was the news from the nation's favourite clothes retailer that pushed shares in the travel, leisure and retail sectors sharply lower. The FTSE 100 index fell 83.8 points to end the day at 6,272.7. Marks & Spencer itself lost almost a fifth of its value on the news that its sales had fallen by more than 2 per cent.

The British Retail Consortium said this week that its members generally had had a disappointing festive season, with sales up just 0.3 per cent on December 2006, the worst showing since 2004.

Sir Stuart joined in calls for a cut in rates. "They have to come down, and they have to come down I think by at least three-quarters of a per cent".

David Kern, economic adviser to the British Chambers of Commerce, said: "Given the threats to the banking system and to the smooth flow of credit, we believe waiting would be a mistake."

A few weeks ago the City consensus was that rates would be kept on hold, after the quarter-point cut on 6 December. But a run of weak data recently has made the Monetary Policy Committee's decision trickier. Most barometers of consumer sentiment are running at multi-year lows, and the subdued state of the housing market has been confirmed in figures on mortgage approvals from the Bank of England and house price data from the Halifax.

Yesterday Persimmon, the UK's biggest homebuilder, revealed a 14 per cent slump in forward sales. Its chief executive, Mike Farley, said that "as a result of the credit crunch, lenders reviewed their mortgage criteria. Some property buyers who had won an agreement for a loan in principle could not meet the new criteria, and we lost those orders".

The Bank of England's credit conditions survey last week suggested the credit crunch has tended to nullify the Bank's efforts to ease monetary policy, with banks and building societies failing to pass on the full benefits of December's rate cut to customers. The absence of Northern Rock from the market and a more picky approach by lenders has reduced competition.

Malcolm Barr, of JP Morgan, said: "The majority view among economists is that the MPC will hold rates before cutting in February, but market pricing suggests the odds of a move are close to 50 per cent, and a cut today would not be much of a surprise."

If rates do stay unchanged, a February cut, coinciding with the Bank's next Inflation Report, is viewed as a near certainty.

The MPC's task has been made more difficult by the persistence of inflationary pressures even as the slowdown has taken hold – so-called "stagflation" or "slow-flation". Energy, transport and food costs have been rising sharply, leading to pressures for higher wages, especially in the public sector. However, the BRC reported that shop price inflation eased slightly last month. The pound has been quietly floating downwards, which will push prices higher. It closed yesterday at $1.9577, compared to $1.9722 at the previous close. It was also down against the euro.

After announcements on interest rates by the MPC and the European Central Bank (eurozone rates are very likely to remain on hold), attention will shift to the US Federal Reserve's chairman, Ben Bernanke, who is due to deliver a speech in Washington later today, and any hints as to whether the Fed intends to cut rates by a quarter or a half percentage point at its next meeting, on 30 January.