Retail sales up again as exports dive

The two-speed economic recovery was emphasised by figures yesterday showing buoyant high street sales and a sharp fall in manufacturers' export orders.

With the Bank of England urging an increase in interest rates to cool the economy despite the strong pound, the Confederation of British Industry (CBI) yesterday pleaded for higher taxes instead. Otherwise, it warned, Britain would face a further rise in the value of the pound and a plunge in export confidence.

Andrew Buxton, the chairman of the CBI's economic affairs committee, said economic policy should be tightened "sooner rather than later", and preferably through higher taxes. "The problem one risks with interest rates is that it will make the pound strengthen even more," he said.

The CBI's comments came as the minutes of the meeting between Kenneth Clarke and Eddie George last month showed that the Governor of the Bank of England called once again for a quarter point rise in the cost of borrowing. If the move was delayed, "more substantial tightening would eventually become unavoidable," Mr George warned.

Although the Chancellor said he and Mr George agreed to differ by a quarter point, most analysts expect whoever has the job after the election to increase interest rates.

This expectation was reinforced by figures for retail sales last month and by the home market aspects of the CBI's quarterly survey of industrial trends.

The volume of sales on the high street rose by 0.3 per cent, and in the latest three months their annual growth rate has picked up to 4.4 per cent. Food sales are growing far more slowly than the rest. Annual growth in sales of non-food items has reached 6.9 per cent, with clothing and footwear especially strong in March.

"This is before the tax cuts, the windfall gains and the election. There is every reason to expect it to pick up further," said Ciarn Barr, an economist at Deutsche Morgan Grenfell.

The CBI survey showed that home orders, although below expectations, remained at their highest rate for two years. Companies predicted their home order books would grow over the next four months at the briskest rate since October 1988.

Despite job losses in the latest quarter, manufacturers said they would increase employment in the next four months for the first time since 1989.

But the strong pound, which has risen by 25 per cent against the German mark in six months, became the biggest constraint on export optimism, for the first time since the depths of the recession in 1981. Export optimism was at a six-year low.

The strong pound also meant that manufacturers' unit costs are expected to fall at the fastest rate since the CBI began its survey.

Some City analysts saw the survey as evidence that there is no inflationary danger. But others said it was misleading to focus on manufacturing.