Treasury discounts Christmas cheer: Flood of cash dampens UK hopes for interest rate cut - German summer revival withers on low orders

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The Independent Online
THE TREASURY warned yesterday that consumer spending figures for December could still look disappointing despite positive anecdotal evidence from the high street and figures showing a sharp jump in the amount of cash circulating in the economy during the month.

But the money figures helped to defuse speculation that the Chancellor will cut interest rates quickly to pre-empt this year's tax increases, which will remove pounds 8bn of spending power from the economy. Fading hopes of a rate cut reinforced profit-taking in the gilts and stock markets, pushing prices lower.

The value of notes and coins in circulation rose by 0.6 per cent in December, slightly less than in the previous month. This gave an annual growth rate of 5.7 per cent, up from 5.5 per cent in the year to November and the fastest rate of increase in three and a half years.

The narrow measure of the money supply, M0 - which also includes balances held by commercial banks at the Bank of England - rose by a slightly more dramatic 5.8 per cent in the year to December, above City expectations. M0 is growing well above the Treasury's 0-4 per cent 'monitoring range' because low interest rates mean people are losing less of a return if they keep their savings as cash.

M0 is seen as a good contemporaneous indicator of high-street spending, although it does not provide a clear guide to the retail sales figure likely in a particular month.

The Treasury warned that high- street spending volumes were anyway very difficult to measure in the period around Christmas, because statisticians had to make significant seasonal adjustments. Retail sales volume fell by a seasonally adjusted 0.8 per cent in December 1992 despite reports of buoyant trading.

Michael Saunders of Salomon Brothers said he expected retail sales volume to have risen 0.3 per cent in December, giving the biggest annual increase since the late 1980s. John Marsland, economist at UBS, said the figures 'support more anecdotal evidence suggesting strong retail sales growth in December over and above that normally associated with Christmas'.

As betting on an early rate cut subsided, the three-month interbank lending rate - which tracks City base rate expectations - rose by 1 16 of a percentage point to 53 8 per cent. Gilts closed sharply lower, also reflecting profit-taking and falls in other bond markets.

The stock market was also hit by profit-taking and by a weak performance on the futures market. The FT-SE index of 100 leading London shares ended 9.9 points lower at 3,408.5, although this was 30 points above the day's low. Some analysts predicted that profit-taking could shave another 100 points off the index. Other European stock markets also saw profit-taking, with the German DAX index losing more than 0.6 per cent of its value on the day.

Concern that the revival seen in the western German economy last spring and summer may have fizzled out was exacerbated by figures showing that industrial output fell a seasonally adjusted 2 per cent in November from October 1993, and was down an unadjusted 3.6 per cent from a year earlier.

Analysts pointed to a 1.8 per cent drop in manufacturing output in November from October as further evidence that the western German economy has probably declined in the fourth quarter after the surprisingly strong third.

'The manufacturing figures show that order reserves are still too small, so that as soon as demand weakens, firms cut back production sharply to prevent stocks growing. Business is still frightened,' said Gerhard Grebe, chief economist with Bank Julius Baer in Frankfurt.

Mr Grebe predicts a 0.5 per cent drop in fourth quarter western German GDP, after the 0.5 per cent growth in the third quarter. The economics ministry blamed unusually cold weather in November.

Richard Reid, chief economist with UBS in Frankfurt, said: 'Even if the November data are exaggeratedly poor due to the weather, the general picture is one where output seems to have stagnated or even fallen again in the fourth quarter.'

Analysts expect the recent signs of weakness in the western German economy to persist through the first quarter of 1994, as a raft of new tax and duty increases drags down consumption. Provisional data shows pre-Christmas retail business was down in real terms by between 5 and 6 per cent on the previous year.

The poor output figures will maintain pressure for an easing of interest rates. However, a cut tomorrow at the first 1994 meeting of the Bundesbank central council is unlikely, say analysts.

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