Sterling at six-month high after double boost: High street spending takes a turn for the better as Britain's trade gap narrows for fourth month running

AN UNEXPECTEDLY sharp surge in high street spending and a fourth successive monthly narrowing in Britain's trade gap yesterday helped to lift the pound to a 6 1/2 -month high against other currencies.

Retail sales volume increased by 1.3 per cent in June, more than twice City forecasts. Britain's trade deficit with countries outside the European Community fell by a fifth on the month to pounds 613m, the smallest gap between imports and exports for 23 months.

Sterling was also boosted by a slight easing in German interest rates. The Bundesbank cut its key 'repo rate' from 7.28 to 7.15 per cent, continuing a gradual loosening of its monetary policy. The pound rose 0.27 pfennigs to DM2.5690 and just under a cent to dollars 1.5125. Against a basket of currencies it closed half a point higher at 82.1 per cent of its 1985 value, its highest since 11 January.

The French franc fell closer to its floor in the European exchange rate mechanism despite the lower repo rate. The broad measure of German money supply, M3, increased at an unexpectedly rapid annual rate of 7.1 per cent in June, suggesting that the fall in the repo rate would probably not be the precursor of a cut in official rates at next Thursday's council meeting. After reports of intervention to support the franc in the afternoon it closed at Fr3.4180 against the mark, 1.25 centimes above its floor.

Sterling jumped immediately after the publication of the June retail sales figures by the Central Statistical Office. The 1.3 per cent rise in sales volume was the largest since January and in line with Tuesday's CBI survey.

The jump in sales follows four months in which the figures have been virtually unchanged. In part it reflected a recovery in clothing and footwear sales, which fell sharply in May because of bad weather. June also saw an early start to summer price-cutting. Clothing and footwear sales were up 8.9 per cent on the month.

James May, director-general of the British Retail Consortium, said: 'Although encouraged by recent trading levels, retailers remain concerned at the lack of solid consumer confidence.'

Tuesday's CBI survey showed that retailers' stocks of unsold goods had risen sharply despite good June trading. This suggests orders from manufacturers may be scaled back.

Kenneth Clarke, the Chancellor, said the good retail sales figures were a sign that 'a broadly based recovery is well under way'. He drew a similar conclusion from a rise in exports in June. Exports to countries outside the EC rose by more than pounds 200m, four times the increase in imports. The non-EC trade gap has been closing since the beginning of the year, halving from around pounds 1.2bn a month.

Exports are showing a trend increase of around 1.5 per cent a month, while imports are falling about 1 per cent. In volume terms both imports and exports are rising by between 0.5 and 1 per cent a month.

The CSO warned that the non-EC figures, which cover less than half Britain's trade, did not provide a reliable guide to the whole-world position. Figures for EC trade have been held up by the abolition of customs controls as part of the European single market programme.

Excluding trade in oil and erratic items such as ships and precious stones, the non-EC trade deficit fell by pounds 316m in June to pounds 538m, the smallest for just under a year. Britain has also enjoyed a visible trade surplus with North America of pounds 176m, the largest since records began in 1990.

Import prices have risen by 10.5 per cent since the devaluation of the pound last September. Export prices have risen by 7.5 per cent as exporters have taken advantage of the falling pound to boost profit margins, as well as to expand market share.

A sharp increase in business confidence to pre-recession levels was shown by a quarterly survey of 1,000 independent companies published by 3i, the venture capital group. Its barometer rose 15 points to an index level of 100, the same as when the survey was started in January 1988 before the recession.

The increase is for the third consecutive quarter and compares with a negative reading on the index of four last September when Britain left the ERM. The 3i report said the North was leading the way in translating confidence into investment and new employment.

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