Surge in high street spending raises hopes

Christmas cheer: Tourists helped swell retailers' coffers, but independent forecast warns of slowdown in expenditure
Click to follow

Economics Editor

Retailers enjoyed a good December, arousing hopes that 1996 will see a return of the "feel-good" factor.

But a new independent forecast based on the Treasury model warned that consumer expenditure would rise in 1996 by 1 per cent less than the Treasury has predicted.

Supported by high levels of discounting, retail sales rose by 4.3 per cent in December on a year ago, according to British Retail Consortium (BRC). This was the strongest increase recorded by the Monitor since April, though below the 4.9 per cent annual increase seen in December 1994. A flurry of trading statements later this week from large retailers such as Dixons, Argos and Storehouse is expected to reinforce the message of strong sales over the Christmas period.

According to the BRC, food and drink and personal computers performed strongly. London stores did particularly well, benefiting from record numbers of visitors from abroad. By contrast, footwear, furniture and carpets and DIY continued to suffer from the low level of turnover in the depressed housing market.

The results were welcomed by James May, BRC director general, as "a good finish to the year". Calling for further reductions in interest rates, Mr May said: "We are reasonably hopeful that with the drop in interest rates and tax cuts, there will be continued recovery in consumer spending in 1996."

However, new figures from the Bank of England showed that the growth in consumer credit fell back in November after the record surge in October. The increase of pounds 613m was about pounds 100m less than the City had predicted, and October's rise was revised down by pounds 40m to pounds 830m.

Although the underlying trend in consumer credit is one of surprising buoyancy - it is rising at an annual rate of about 13 per cent - this is not generally interpreted as a portent of a consumer boom. "Consumers have come out of the recession not just looking for bargains in the high street but in how they finance them," said Jonathan Loynes, economist at HSBC Markets.

In its latest forecast of the UK economy using the Treasury model, the Ernst & Young Item Club predicted a growth of consumer spending of 2.4 per cent in 1996, considerably less than the 3.5 per cent projected by the Treasury at the time of the Budget.

However, the forecast saw sluggish growth in the first six months giving way to much more buoyant conditions. According to Paul Droop, chief economist, "the second half of 1996 holds out the possibility of a return to much stronger spending in the high street".

The forecast disagrees with the Treasury view that spending will be boosted not just by rising real income but also by consumers dipping into their savings. Instead, Paul Droop argues that consumers are still intent on building up financial assets to compensate for the depletion of wealth through the decline in the housing market.

Hopes that the housing market may be on the turn were bolstered by a rise in net lending from pounds 947m to pounds 1,233m in November. However, the number of new mortgage offers - often seen as a reliable lead indicator of house prices - fell back slightly to 79,000 from 80,000 in October.