View from City Road: Optimism with reservations

The CBI's latest distributive trades survey bodes well for tomorrow's retail sales figures, suggesting that high street spending rose sharply in June.

But do not get carried away with enthusiasm. The survey also casts doubt on the strength of recovery in the next few months since it shows retailers may have made a serious planning error. They have heavily overstocked their shelves and will probably cut back their orders from manufacturers.

By a majority of more than two to one retailers told the CBI that trade was more buoyant in June than a year earlier - the most upbeat response since April 1990. Similarly, there has been a sharp improvement in the number of retailers reporting good trade for the time of year.

Economists at Midland Global Markets have studied the past relationship between the CBI survey and the Central Statistical Office's sales data, and derived rules of thumb to predict the official figures.

These suggest that the volume of high street spending rose by more than 1 per cent between May and June after adjusting for normal seasonal patterns, which would put it back on a firmly rising trend.

A rise in spending should come as no surprise following last week's inflation figures. These showed the biggest June falls in clothes and household goods prices since the 1950s - clear evidence that the summer sales have started early.

Unfortunately, this appears to have been the result of retailers' earlier over-confidence. Since March, they have consistently overestimated their sales and dramatically increased orders from suppliers.

But the goods have stayed on the shelves. Unwanted stocks have risen to a 14-month high and orders are now being scaled back. Although the price cuts appear to have revived spending from the doldrums of the past few months, retailers still expect to be saddled with much larger stocks than they want.

This over-optimism helps to explain why factory output has surged as domestic demand has remained subdued, while many of Britain's export markets have slipped deeper into recession. Retailers are now facing reality, and manufacturers may soon have to do so as well.