Worst of UK consumer slowdown 'is over'

British retail sales fell in July at half the expected rate, leading many analysts to conclude the worst of the consumer slowdown is over and bolstering expectations that interest rates would stay on hold for now.

The Office for National Statistics said yesterday that sales fell by 0.3 per cent last month, only partly reversing June's huge 1.2 per cent jump and taking the annual rate up to 1.8 percent. Analysts had expected a fall of 0.6 per cent. Quarterly growth in sales, meanwhile, moved up to its highest level since November and the ONS said the underlying trend was up.

"This data provides signs that the retail sector is stabilising," said John Butler, UK economist at HSBC Markets.

"That, alongside the rise in inflation and split amongst the Monetary Policy Committee, supports the view interest rates will stick at 4.5 per cent for the foreseeable future."

The Bank of England cut interest rates for the first time in two years earlier this month in a bid to revive consumer spending which has slowed markedly since the start of the year.

But minutes of the nine-strong rate-setting committee's meeting showed the quarter-point cut was opposed by four members, including Governor Mervyn King, who worried that inflation could still become a problem.

Shop prices were on average 0.6 per cent lower than a year ago, the same as in June, suggesting that retailers are not cutting prices that aggressively despite complaining about tough trading conditions since the start of the year.

The news drove sterling to a six-week high against the euro and interest rate futures trimmed gains as dealers priced in less chance of further cuts in borrowing costs.

The ONS said a few retailers had reported weaker sales because of the bomb attacks in London last month but the effect was difficult to quantify.

Separately, the ONS reported a higher than expected public sector net cash surplus of £8.25 billion as corporation tax receipts increased and spending growth eased.

The government's preferred measure of the public finances - net borrowing - posted a surplus of £2.87 billion and the current budget surplus came in at £5.3 billion, the highest total for July on record, the ONS said.

That should give Chancellor of the Exchequer Gordon Brown more leeway on meeting his golden rule - that the government only borrows to invest over the economic cycle - but economists said borrowing may still overshoot his forecast of £31.9 billion this fiscal year.

"Extrapolation from data for the first four months of the year still suggests that the overall budget deficit could be close to £40 billion in 2005/6," said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.

"But, with the economic cycle now judged by the Treasury to start in 1997/98, this would still allow the Golden Rule to be met by a margin of around nine billion pounds if the current cycle ends in 2005/6."

A spokesman for the Treasury said: "The government is meeting its fiscal rules and will continue to do so.".

Expectations about this month's Bank of England interest rate cut may have also reduced demand for mortgages in July as consumers waited for better deals, figures from the British Bankers' Association showed yesterday.

The BBA said underlying mortgage lending rose by £3.7 billion last month. That was the weakest increase since December 2001 but economists said the figures still pointed to a gradual slowdown in the housing market.

"These figures continue to suggest that house prices are unlikely to crash in the near-term, although we continue to argue that over the longer-term prices will need to adjust downwards," said George Buckley, UK economist at Deutsche Bank.