Shops and factories start new year on gloomy note

The UK economy suffered an unhappy start to the new year with the worst Christmas trading session for a decade, manufacturing back on the brink of recession and the housing market ripe for a crash.

A barrage of gloomy data revived hopes the Bank of England would soon cut rates although analysts doubted that would come as soon as next week.

High street shops said sales fell in December – the first fall for a Christmas since the UK was mired in recession in 1992, according to a survey by the Confederation of British Industry. Ian McCafferty, its chief economist, said: "If the mood of consumers is still low into the new year, then the outlook for the UK economy is seriously worrying."

The survey, which covered the period to 18 December, echoed anecdotal evidence that pre-Christmas trade was weak.

Yesterday John Lewis said sales for the week to 21 December rose an anaemic 0.2 per cent. Visitor numbers to UK shopping centres fell, according to a separate report.

However, there is an equal weight of evidence that households simply deferred their purchases to take advantage of the early new year sales. John Lewis said sales in the week to 28 December were up 7.9 per cent. Figures from the research firm FootFall showed 3.9 per cent more people went shopping during the Christmas week than a year ago. The first clear picture will come next week with the British Retail Consortium figures.

The CBI said while sales growth was still supported by areas linked to the booming housing market, this was less evident than in the recent past.

Economists fear a sudden collapse in house prices could panic consumers into cutting their spending and borrowing.

Yesterday Nationwide building society warned there would probably be price falls in hot spots in London and the South-east although it ruled out a repeat of the devastating crash of the early 1990s.

There was little sign that manufacturing would act as an engine of growth in 2003, according to the latest survey of managers. The Chartered Institute of Purchasing and Supply said the sector contracted last month for the first time since July as customers cut back on new orders.

The report said demand was hit by the rise in the value of the pound against the dollar and by poor economic conditions in continental Europe.

The Bank of England has kept rates on hold for 13 months, saying that the strength of the housing market prevented it from acting to help the business sector.

Analysts said yesterday's figures would not be enough to change minds ahead of next week's meeting of the Bank's monetary policy committee although it might change the tone of the debate.