Warmest March on record heats up shop sales

Fears that war in Iraq would hit consumer spending faded yesterday as figures showed retail sales grew unexpectedly in March while household confidence surged after the end of hostilities.

High street shops enjoyed a 0.6 per cent bounce in sales volumes in March, the best month since December and much better than the zero growth economists were expecting.

The Office for National Statistics (ONS) also revised up the figure for February from a 0.1 per cent fall to growth of 0.3 per cent.

The growth in March was spread across the board apart from department stores which suffered a fall. The ONS said the biggest winners were those shops that could take advantage of the warmest March on record.

However, the 1.0 per cent fall in January meant that sales grew by just 0.1 per cent over the quarter, the worst result for more than four years.

Meanwhile, confidence rebounded from an eight-year low as the conflict ended, according to a regular monthly poll of 2,000 Britons. The index in the survey by Martin Hamblin GfK jumped five points this month, the biggest rise since January 2002 as consumers grew more optimistic about the prospects for the economy.

The data are the latest in a series of figures that have see-sawed between gloom and optimism, making next week's decision on interest rates a knife-edge event.

Jonathan Loynes at Capital Economics said: "The figures have made the May meeting a rather closer call. But we still expect a quarter-point cut as the Bank of England responds to the general weakness of activity in recent months."

But Ross Walker, at Royal Bank of Scotland, said the bounce in confidence showed the "Iraq effect" that depressed sentiment in February and March had begun to unwind. He said: "It reinforces the conclusions from today's retail sales data that some of the pessimism about the prospects for UK consumer demand has been overdone."

But despite the different interpretations, both said they expected the Bank's Monetary Policy Committee to cut rates to a 48-year of low of 3.5 per cent next Thursday.

Separate figures from the main high street banks showed a record number of homeowners took out an extra mortgage to cash in the value of their property. There was a 41 per cent rise in households releasing equity from their homes with 86,858 approvals, the highest figure on record, the British Bankers' Association said.

John Butler, UK economist at HSBC, said: "Much of the current acceptance that the consumer and housing market are slowing aggressively appears overdone."

Paul Clarke, a director of Barclays Business Banking, said May would be the "critical month" when consumers would feel the impact of the hike in national insurance contributions on their pay packets.

The picture was mirrored in the United States where consumer confidence soared in April after four months of decline although that did not translate into a shopping spree at the malls. The Conference Board's index of consumer confidence leapt to 81.0 in April from 61.4 in March, far above expectations of a reading near 70. It was the biggest one-month gain since after the end of the Gulf War in 1991.