Weak housing market holds back spending: Retail sales nudge higher but flat mortgage figures cause concern

HIGH-STREET spending nudged higher in June, despite evidence that the weakness of the housing market is depressing demand for household goods. Flat mortgage lending figures held out few hopes of an early housing pick-up.

The volume of retail sales rose by 0.2 per cent between May and June, after adjusting for seasonal changes, according to the Central Statistical Office.

The 3.3 per cent rise in sales over the past year was weaker than the Confederation of British Industry's distributive trades survey had suggested. Sales of household goods fell by 1.1 per cent during the month.

'The erratic nature of the housing market is a cause of concern and adversely affects many of the housing-related product categories,' Hugh Clark, trading policy director of the British Retail Consortium, said. 'There is no reason to believe July's figures will be any better than June's'

The revival in the housing market early in the year appears to have stalled. Housing transactions were barely changed between May and June, and below the levels seen in the first quarter.

A similar message came from the Building Societies Association, which reported pounds 3.6bn of net new mortgage commitments last month, up from pounds 3.3bn in May. Ian Shepherdson, economist at HSBC Greenwell, said net new commitments had been flat for two months running after adjusting for seasonal changes.

Bank and building society lending was stronger than the City expected in June at pounds 2.9bn, with manufacturers, consumers and the financial sector all stepping up their borrowing. The British Bankers Association reported a pounds 179m rise in borrowing on bank credit cards, part of the biggest rise in consumer borrowing since December 1990.

City economists concluded that there was little in the figures to affect prospects for interest rates. Minutes of the meeting six weeks ago between the Chancellor and the Governor of the Bank of England showed the Governor warning that rates would have to rise in advance of clear evidence that price rises were accelerating significantly if inflation was to be kept under control. But that point had not yet been reached and rates need not yet rise.

The Chancellor was rather more wary about tightening policy, arguing only that 'if inflationary pressures picked up, interest rates might have to be raised at some point in the future'.

Some tentative evidence of possible future inflationary pressure emerged in the latest economic survey from the British Chambers of Commerce, which showed that companies were having greater difficulty recruiting suitably qualified workers than at any time for more than three years.

'Recruitment can be a costly burden if staff of the right calibre are hard to find. This may throw an anchor on the rate of employment growth and put upward pressure on wages. As recovery picks up, endemic skills shortages underline a structural weakness in the economy,' the BCC argued.

(Graphs omitted)