Shoppers raise hopes of revival

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Evidence of a consumer-led recovery is growing, with shops reporting that workers are spending the extra cash they found in their pay packets after the new lower tax rates took effect.

Further signs of revival came from stores group John Lewis at the weekend: Brian O'Callaghan, its director of trading, said: "We would have to go back to the last half of the Eighties to find similar rates of growth."

For the 11 weeks to 13 April, Lewis's department store sales rose by 13.1 per cent on the previous year. Sales at its Waitrose stores also grew by 13 per cent for the same period, contributing to an overall sales growth for the group of 12.6 per cent.

The figures add to recent statistics showing a more confident consumer. Last week, there was a bullish report from the British Retail Consortium in its monthly snapshot of retailing. Trade in the shops in March, compared with 1995, jumped 7.5 per cent, its fastest rate for two and a quarter years. Better-than-expected results from Tesco also underpinned confidence in the high street, and shares in stores groups stormed ahead.

The moribund housing market also enjoyed a flicker of recovery. A recent Halifax Building Society report showed that house prices rose for the eighth month running in March - the longest sustained increase since 1989.

With mortgage rates also at their lowest for 30 years, and manufacturing still depressed from the effects of a big destocking, the economy's fortunes now seem dependent on the shopper. The latest figures bring comfort to Chancellor Kenneth Clarke and Tory politicians, who desperately require stronger growth if they are to have any chance of making tax cuts before the next election.

Confirmation of the direction of consumer spending will come on Thursday, when official March retail sales figures are released. The City forecasts growth will be 0.2 to 0.6 per cent above February's level.

However, the overall picture remains mixed. Neil MacKinnon, chief economist at Citibank, is cautious about consumer recovery. He cites the failure of the economy to generate full-time jobs as likely to keep a lid on consumer spending and adds that investors will be extremely disappointed if the March figures do not back the other indicators. His prediction is that they will come in at 0.2 per cent, at the bottom of the range.

John Major has also talked up consumer windfalls boosting spending. But some question how much of the pounds 52bn expected to reach consumers' coffers by the end of next year will actually be spent.

The other big question is what a consumer-led recovery heralds for interest rates. At their last meeting, Mr Clarke and Bank of England Governor Eddie George agreed that there may be a need for interest rates to rise later this year, depending on inflation.

Critics says Mr George is obsessed with inflation, at the cost of the real economy. But although inflation remains subdued, an unchanged March figure disappointed the City, which had expected a further small reduction.