Consumer boom may be running out of steam

Retail sales suffered an unexpected plunge while demand for mortgages fell last month, sparking fears that the consumer boom has finally run out of steam.

The volume of sales crossing shops' tills plummeted 0.7 per cent in June, following a 0.5 per cent drop in May, making it the first two-month fall for four years.

Shoppers shunned the high street in favour of the delights of televised World Cup football matches and golden jubilee celebrations. Retailers may also have suffered because of the unusually cold weather in June, the Office for National Statistics (ONS) said.

The fall was driven by a 4 per cent drop in household goods ­ "big-ticket" items such as fridges and TVs ­ which are now running at their slowest rate since June 1998.

The figures, which coincided with separate data showing a marked fall in demand for home loans, came a day after business leaders said there was no reason for the Bank of England to hike interest rates next week.

But the combination of the World Cup and the longer jubilee bank holiday weekend led many analysts to say they would wait for figures covering July before calling the turn in the consumer economy.

ONS statisticians said anecdotal evidence from retailers pointed to a mass shutdown by smaller shops, a drop in sales on days when England played its World Cup matches and a dampening effect on enthusiasm for shopping because of the weather.

Nick Verdi, UK economist at Barclays Capital, said his estimates showed that sales probably rose by 1.8 per cent on the month, once these factors were taken into account. "Sales probably were not anything like as weak as the ONS numbers suggest," he said. "The MPC should be aware of these issues. These numbers should be considered rate neutral rather than rate bullish."

Adam Cole, at Credit Agricole Indosuez, pointed out that the quarterly growth of 1.7 per cent did not indicate a slowdown and would contribute to a large rise in quarterly GDP when figures are released today.

Simon Rubinsohn, at Gerrard stockbrokers, agreed the figures needed to be treated with caution but said they echoed the gloom from retailers' trading statements.

Boots yesterday said trading conditions were "challenging" while a similar message has come out of Debenhams, Argos and the furniture store MFI.

Mr Rubinsohn said sales would have been even weaker if stores had not cut their prices at the steepest rate since modern records began. "Even without another precipitous drop in shares, the [Bank] is likely to have little excuse to raise rates until the second quarter of next year at the earliest," he said.

Whatever the City's medium-term forecasts, economists are unanimous rates will stay on hold next week, with share prices tumbling, inflation at its lowest for a quarter of a century and manufacturing struggling to emerge from recession.

All the analysts in two separate polls said they expected the Bank's Monetary Policy Committee to leave rates at their 38-year low of 4 per cent.

Meanwhile, the British Bankers' Association said mortgages for house purchase dropped last month, falling 17 per cent by number and 3 per cent by value compared to June 2001. Banks lent a total of £7.73bn in June compared with May's record £9.59bn, while the number of mortgages approved fell to a four-month low of 204,600.

Ian Mullen, BBA's chief executive, said: "Whether the contrast [between May and June] is entirely a result of the shorter working month, or whether demand is peaking will only become clear as we move further into the summer months. But the weakening of loans approved for house purchase might suggest a slow down in the housing market."