High street spending up as trade deficit falls: - More homes freed from negative equity - Clarke hails evidence of economy's 'balanced recovery'

A SURPRISE jump in high street spending and an unexpectedly big fall in Britain's trade deficit were hailed yesterday by the Chancellor of the Exchequer, Kenneth Clarke, as evidence that the economy is enjoying a 'good and balanced recovery so far'.

Further good news came with figures showing that business confidence has returned to pre-recession levels and that more than 350,000 households have been released from the negative equity trap by rising house prices.

The Woolwich Building Society said the number of households whose mortgage is larger than the value of their home has dropped from a peak of 1.8 million in the first quarter of the year to 1.45 million at the end of the second quarter.

In the South-east, where prices rose 2.2 per cent, the number of home owners with negative equity dropped from 455,000 to 404,000. But the percentage fall was greater in other regions.

Martin Ellis, housing economist at the Woolwich, expects prices to end the year 1.5 to 1.75 per cent higher than January, with a 3.5 per cent rise next year.

Meanwhile, Mr Clarke warned the Commons Treasury Select Committee that more might have to be done to cut government borrowing in the November Budget. He hinted he would prefer to increase indirect taxes on spending rather than direct taxes on incomes. He also said he was not worried that the pound's strength would harm British competitiveness. His comments boosted it further to the highest close since early January.

The pound jumped earlier on news that the volume of goods sold in the shops in June was 1.3 per cent up on May, the biggest rise since January. This was partly a bounce-back after May's bad weather and partly the result of an early start to summer sales.

Sterling was also boosted by a fall in Britain's trade deficit with countries outside the European Community to pounds 613m in June, from pounds 770m in May. Export volume rose 6 per cent on the month, more than double the rise in imports.

A recent survey by the Confederation of British Industry suggested that the rise in sales might be halted as retailers found themselves with excessive stocks of unsold goods. Signs that the negative equity problem is easing may boost spending as more people are able to move house.

But not all these households are free to move. Lenders normally require a 5 per cent deposit before granting a mortgage, and movers would have to find several thousand pounds to cover estate agency, surveyor's and legal fees, and stamp duty.

The other blot on the rosy picture painted by the Woolwich survey is that the 3.2 per cent increase is in average prices between the two quarters and does not reflect a downturn in prices in both May and June, according to the Halifax. That suggests some houses have returned to negative equity.

Pound rises on upbeat figures, page 25

(Graph omitted)