Sales gloom sets dilemma for Clarke on rates

Further evidence that the recovery is faltering was provided yesterday by weak retail sales figures for March. Sales dropped back by 0.1 per cent from the level reached in February, against City expectations of a rise of 0.3 per cent. Sales in the first quarter were down on the last quarter of 1994, the first such fall since the beginning of 1992.

This latest indication of a slowing economy will compound the pressure on the Chancellor to resist an interest rate rise when he meets the Governor of the Bank of England at the beginning of May. The Governor may argue for a rise because of sterling's weakness. The decline, consistent with a halving in the annual growth of retail sales from about 4 to 2 per cent in the past year, made it clear why Kenneth Clarke was able to assure the BBC's Today programme that there would be no return to "an artificial consumer boom that will collapse in ruins". Many might take the view that any consumer boom of the past few months has already collapsed in ruins. The retail sales figures added to further evidence this week that the three interest-rate increases since September, together with the tax squeeze, are proving more than enough to rein-in the economy.

A Gallup poll reported a fall-off in consumer confidence since the start of the year. A survey of Barclays branch managers revealed customers increasingly reluctant to take on new commitments and finding it more difficult to meet repayments. And the quarterly survey of the British Chambers of Commerce found firms under pressure from the slowdown in demand. Last week's job figures showed unemployment falling at only half the rate notched up in the last quarter of 1994.

Consumers appear in no mood to return to their spendthrift ways of the 1980s. Sales of household goods fell sharply, suggesting that retailers' recent success in pushing through price increases in this sector has come at a cost. With the housing market so depressed, slack demand may render short-lived this attempt to rebuild margins.

Continuing consumer resistance to higher prices is also apparent in a striking contrast between small and large retailers, particularly the big food supermarket chains. Sales by small outlets (annual turnover less than £3m) fell on an annual basis by 1 per cent in the three months to February. Meanwhile, the big retailers chalked up a 6 per cent growth over the same period. The figures, which do not include National Lottery sales, were described by Adam Cole, economist at James Capel, the securities house, as very disappointing.

They followed the blow to the Government of a higher public sector borrowing requirement in March than had been expected. But Mr Clarke said in his radio interview that the borrowing figures had fallen by £9bn since last year, faster than anywhere else in Western Europe, adding that forecasts were for a further fall in public borrowing to £21bn this year. "I have been getting the public finances healthy again," he insisted.

In terms that reasserted the Government's long-term commitment to tax cuts without exciting extravagant expectations for the 1995 Budget, the Chancellor said: "As you get spending and borrowing down, then you can return to the tax-cutting agenda which the Conservative Party [wants]."

His more immediate worry is whether to raise interest rates. The sluggish state of consumer spending would seem to point to keeping rates on hold. But the weakness of the pound points to a rise.

Comment, page 17

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