Refreshing signs of growth for Clarke

Diane Coyle
Thursday 21 March 1996 00:02 GMT
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A gratifying picture for the Chancellor of the economy picking up - but not so fast that it will prevent a further cut in the cost of borrowing - emerged from new figures yesterday.

Retail sales rebounded last month from their January dip, mortgage lending edged ahead and other borrowing was buoyant, while consumer confidence this month has risen slightly, according to the EU's monthly survey. However, confirming the weakness of manufacturing in contrast to the strengthening consumer sector, a survey of the engineering industry revealed that its output in the latest three months grew at the slowest rate for two years.

The further signs of booming borrowing and rapid broad money growth prompted some economists to worry about rising inflation later this year. "The long-term outlook for inflation is becoming a little less comfortable," said Martin Brookes at Goldman Sachs. But minutes of the February meeting between Chancellor Kenneth Clarke and Eddie George, Governor of the Bank of England, showed them downplaying the inflationary risk posed by monetary growth.

Many City analysts firmly expect Mr Clarke to opt for a fourth cut in base rates - perhaps in May, when the monetary meeting takes place five days after the local elections. "The new figures definitely do not stand in the way of a reduction," said Paul Mortimer-Lee at Paribas.

The volume of retail sales jumped 0.6 per cent in February, reversing a drop the previous month. A surge in sales of household goods during the month and higher food sales accounted for the increase, which took the year-on-year growth in sales volumes down slightly to 1.9 per cent. Underlying growth has been strongest in clothing and footwear.

Sales growth has been around 2 per cent for the past three months but the level remains scarcely any higher than it was in November. This is weaker than survey and anecdotal evidence have suggested. "Sales performance is patchy and erratic," said Ian Shepherdson at HSBC Markets.

Separate figures showed that the pattern of gentle recovery in the housing market continued with a slight increase in total high street bank and building society mortgage lending to pounds 1.42bn in February from pounds 1.41bn. Building societies lost some market share to banks. Peter Williams, head of research at the Building Societies Association, said: "Taken overall, indicators continue to suggest that a modest housing market recovery is now under way."

Building society loans dipped to pounds 792m from pounds 832m in January, but bank mortgages climbed to pounds 631m from pounds 578m.

The British Bankers' Association said other lending was buoyant, with the monthly rise of pounds 3.4bn well ahead of the recent average. Non-mortgage lending to individuals was pounds 333m, similar to the previous month. Lending to manufacturing was more than pounds 100m higher at pounds 278m. Analysts said lending for takeover activity played a part in explaining the strength of corporate borrowing.

Total lending included in M4 was pounds 7.3bn, down from pounds 9.8bn in January but still swollen by the effects of lending and borrowing in the new gilts repo market. Both banks and building societies reported inflows of deposits almost as high as a year earlier, suggesting that January's Tessa outflow eased last month. Broad money growth declined from 10.7 per cent to a slightly more comfortable 9.9 per cent.

The weak note yesterday was sounded by the Engineering Employers Federation's quarterly survey. Output and new orders grew but at the slowest pace for two years. The director-general, Graham Mackenzie, said: "The recovery in engineering is poised on a knife-edge."

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