Spending fears quash recovery hopes

TENTATIVE signs of revival in manufacturing industry stopped the economy sliding deeper into recession between April and June. However, a fall in high street spending last month fuelled City fears that the economy may already be weakening again.

The total output of goods and services between April and June was 0.1 per cent lower than in the previous quarter, the Central Statistical Office said yesterday. But, excluding North Sea oil and gas production, output was 0.1 per cent higher, ending a sequence of seven consecutive quarterly falls.

Factory output between April and June was 0.4 per cent higher than in the previous three months. Service industry output was flat and construction declined.

The figures suggest the economy was basically flat in the second quarter. The provisional estimates of changes in gross domestic product are so small that they could well be revised away when final figures are released next month.

The Treasury said the rise in non-oil GDP was 'encouraging'. 'But we would not say on this basis that the recession has definitely ended. Signs of increases are rather mixed,' a spokesman said.

National output has fallen by 4.2 per cent so far during this recession, compared with a 5.5 per cent fall in 1979-81 and 3.5 per cent in 1974-5. This recession has been longer, but shallower, than the downturn in the early 1980s.

High street spending figures for July, also released yesterday, suggest the economy has entered the third quarter on a more depressed note. Savage price-cutting, which has been reflected in unexpectedly sharp falls in inflation, has failed to boost high street trade.

The volume of retail sales in July was 0.3 per cent lower than in June and 0.6 per cent down on a year earlier, the CSO said. The last time spending was this depressed was in March, when it was hit by pre-election uncertainty. The CSO also cut its earlier estimates of spending in April, May and June.

The CSO said the figures were broadly in line with the recent distributive trades survey by the Confederation of British Industry, in which retailers reported sales lower for the time of year than in any month since the early 1980s.

High street trade has been broadly flat for well over a year. 'There are spasmodic signs of improvement which do not go on for very long,' James May, director general of the British Retail Consortium, said. He added that August trade showed little sign of change, with furniture and furnishing depressed, but clothing and footwear doing slightly better.

Food retailers and department stores reported sales 0.4 per cent lower in July than a month earlier. Household goods sales were flat and clothing sales slightly higher. Comparing May to July with the previous three months - which smooths monthly changes - overall retail sales were up 0.3 per cent, despite a 0.7 per cent drop for department stores.

City economists said July's fall in retail sales emphasised that any signs of recovery were fragile. Gavyn Davies, economist at Goldman Sachs, said: 'There is a reasonably high probability that GDP will be down in the third quarter. The big picture has for months been that the economy is flat.'

Kevin Gardiner, economist at Warburg Securities, forecasts that a temporary fall in factory output will see the second quarter rise in non-oil GDP more than wiped out by September. He expects manufacturing industry to face disappointing export demand and a need to cut domestic stocks of unsold goods. The recent CBI Regional Trends Survey showed manufacturers' expectations of future output sharply lower in July than in the aftermath of the election.

'It is all very dismal,' David Owen, of Kleinwort Benson, said. 'With the suspension of stamp duty on houses being lifted at midnight (last night) and retail sales falling, it all points to a very fragile second half.'

Cork Gully, the insolvency practitioner, reflected the economic gloom by raising its forecast of business failures and personal bankruptcies for this year by 10,000 to 80,000.

The financial markets showed little reaction to the figures. The pound fell 0.1 pfennigs to a new ERM low of DM2.8122, while the escudo dropped by over 1 per cent in response to a one-point cut in Portuguese interest rates.

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